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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 June 30, 2010

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File Number: 000-15366





ALLIANCE FINANCIAL CORPORATION

(Exact name of Registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|New York                                                       |  | 16-1276885                          
|(State or Other Jurisdiction of
Incorporation or Organization) |  | (IRS Employer
Identification Number)

120 Madison Street,Syracuse, New York 13202

(Address of Principal Executive Offices) (Zip Code)

(315) 475-2100

(Registrants Telephone Number including area code)





Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large Accelerated Filer |  |  ̈ |  | Accelerated Filer         |  | x
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller Reporting Company |  |  ̈

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x

The number of shares outstanding of the Registrants common stock, $1.00 par value, on August 4, 2010 was 4,662,792 shares.









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##### Table of Contents

TABLE OF CONTENTS



|                              |  |          |  |                                                                                       |  |               
|----------------------------- |  | -------- |  | ------------------------------------------------------------------------------------- |  | --------------
|                              |  |          |  |                                                                                       |  | Page Number(s)
|                              | 
|FORWARD-LOOKING STATEMENTS    |  | i       
|                              | 
|PART I. FINANCIAL INFORMATION |  |         
|                              |  |          | 
|                              |  | ITEM 1.  |  | FINANCIAL STATEMENTS (ALL UNAUDITED)                                                  |  |               
|                              |  |          | 
|                              |  |          |  | Consolidated Balance Sheets                                                           |  | 1             
|                              |  |          |  | Consolidated Statements of Income                                                     |  | 2             
|                              |  |          |  | Consolidated Statements of Changes in Shareholders Equity                            |  | 3             
|                              |  |          |  | Consolidated Statements of Cash Flow                                                  |  | 4             
|                              |  |          |  | Notes to Consolidated Financial Statements                                            |  | 5-16          
|                              |  |          | 
|                              |  | ITEM 2.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 17-30         
|                              |  |          | 
|                              |  | ITEM 3.  |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 30-31         
|                              |  |          | 
|                              |  | ITEM 4.  |  | DISCLOSURE CONTROLS AND PROCEDURES                                                    |  | 31            
|                              | 
|PART II. OTHER INFORMATION    |  |         
|                              |  |          | 
|                              |  | ITEM 1.  |  | LEGAL PROCEEDINGS                                                                     |  | 32            
|                              |  |          | 
|                              |  | ITEM 1A. |  | RISK FACTORS                                                                          |  | 32            
|                              |  |          | 
|                              |  | ITEM 2.  |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                           |  | 32            
|                              |  |          | 
|                              |  | ITEM 3.  |  | DEFAULTS UPON SENIOR SECURITIES                                                       |  | 32            
|                              |  |          | 
|                              |  | ITEM 4.  |  | REMOVED AND RESERVED                                                                  |  | 32            
|                              |  |          | 
|                              |  | ITEM 5.  |  | OTHER INFORMATION                                                                     |  | 32            
|                              |  |          | 
|                              |  | ITEM 6.  |  | EXHIBITS                                                                              |  | 32            
|                              | 
|SIGNATURES                    |  | 33      
|                              | 
|EXHIBITS                      |  |         



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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 possibilities:



| |  |  | changes in the interest rate environment that reduce margins;
| | - |  | -------------------------------------------------------------



| |  |  | changes in the regulatory environment;
| | - |  | --------------------------------------



| |  |  | we operate in a highly competitive industry and market area;
| | - |  | ------------------------------------------------------------



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



| |  |  | changes in business conditions and inflation;
| | - |  | ---------------------------------------------



| |  |  | changes in credit market conditions;
| | - |  | ------------------------------------



| |  |  | changes in the securities markets which affect investment management revenues;
| | - |  | ------------------------------------------------------------------------------



| |  |  | increases in FDIC deposit insurance premiums and assessments could adversely affect our financial condition;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | changes in technology used in the banking business;
| | - |  | ---------------------------------------------------



| |  |  | the soundness of other financial services institutions may adversely affect our credit and liquidity 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 may subject Alliance to additional risks;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | changes in key management personnel 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 could significantly impact our business; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | other factors detailed from time to time in Alliances Securities and Exchange Commission filings
| | - |  | -------------------------------------------------------------------------------------------------

Although we believe that the expectations reflected in such forward-looking statements are reasonable, actual results may differ
materially from the results discussed in these forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Neither Alliance nor the Bank undertakes 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.

Throughout this report, the terms Company, Alliance, we, our refers to the consolidated
entity of Alliance Financial Corporation, its wholly-owned subsidiaries, including Alliance Bank, N.A. (the Bank) and Ladds Agency, Inc., 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.



i



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PART I. FINANCIAL INFORMATION

ITEM 
1: FINANCIAL STATEMENTS

Alliance Financial Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)



(In thousands, except share data)



|                                                                                                                                                                  |  |               |           |   |                   |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ----------------- | - | --------- | -
|                                                                                                                                                                  |  | June 30, 2010 |           |   | December 31, 2009 |  
|                                                                                                                                                                  |  | (Unaudited)   |           |   |                   |  
|Assets                                                                                                                                                            |  |               |           |   |                   |   |           |  
|Cash and cash equivalents                                                                                                                                         |  | $             | 25,135    |   |                   | $ | 26,696    |  
|Securities available-for-sale                                                                                                                                     |  |               | 406,769   |   |                   |   | 362,158   |  
|Federal Home Loan Bank of New York (FLHB) and Federal Reserve Bank (FRB) stock                                                                                |  |               | 9,813     |   |                   |   | 10,074    |  
|Loans and leases held-for-sale                                                                                                                                    |  |               | 740       |   |                   |   | 1,023     |  
|Loans and leases, net of unearned income and deferred costs                                                                                                       |  |               | 915,151   |   |                   |   | 914,162   |  
|Allowance for credit losses                                                                                                                                       |  |               | 10,293    |   |                   |   | 9,414     |  
|                                                                                                                                                                  |  |               |           |   |                   |   |           |  
|Net loans and leases                                                                                                                                              |  |               | 904,858   |   |                   |   | 904,748   |  
|                                                                                                                                                                  |  |              
|Premises and equipment, net                                                                                                                                       |  |               | 19,499    |   |                   |   | 20,086    |  
|Accrued interest receivable                                                                                                                                       |  |               | 4,420     |   |                   |   | 4,167     |  
|Bank-owned life insurance                                                                                                                                         |  |               | 27,889    |   |                   |   | 27,354    |  
|Goodwill                                                                                                                                                          |  |               | 32,073    |   |                   |   | 32,073    |  
|Intangible assets, net                                                                                                                                            |  |               | 9,495     |   |                   |   | 10,075    |  
|Other assets                                                                                                                                                      |  |               | 16,040    |   |                   |   | 18,790    |  
|                                                                                                                                                                  |  |               |           |   |                   |   |           |  
|Total assets                                                                                                                                                      |  | $             | 1,456,731 |   |                   | $ | 1,417,244 |  
|                                                                                                                                                                  |  |               |           |   |                   |   |           |  
|                                                                                                                                                                  |  |              
|Liabilities and shareholders equity                                                                                                                              |  |               |           |   |                   |   |           |  
|Liabilities                                                                                                                                                       |  |               |           |   |                   |   |           |  
|Deposits:                                                                                                                                                         |  |               |           |   |                   |   |           |  
|Non-interest-bearing deposits                                                                                                                                     |  |               | 162,147   |   |                   |   | 159,149   |  
|Interest-bearing deposits                                                                                                                                         |  |               | 956,023   |   |                   |   | 916,522   |  
|                                                                                                                                                                  |  |               |           |   |                   |   |           |  
|Total deposits                                                                                                                                                    |  |               | 1,118,170 |   |                   |   | 1,075,671 |  
|Borrowings                                                                                                                                                        |  |               | 161,399   |   |                   |   | 172,707   |  
|Accrued interest payable                                                                                                                                          |  |               | 1,450     |   |                   |   | 1,745     |  
|Other liabilities                                                                                                                                                 |  |               | 17,226    |   |                   |   | 17,412    |  
|Junior subordinated obligations issued to unconsolidated subsidiary trusts                                                                                        |  |               | 25,774    |   |                   |   | 25,774    |  
|                                                                                                                                                                  |  |               |           |   |                   |   |           |  
|Total liabilities                                                                                                                                                 |  |               | 1,324,019 |   |                   |   | 1,293,309 |  
|                                                                                                                                                                  |  |              
|Shareholders equity                                                                                                                                              |  |               |           |   |                   |   |           |  
|Preferred stock  par value $1.00 a share; 900,000 shares authorized, none issued and outstanding                                                                 |  |               |          |   |                   |   |          |  
|Preferred stock  par value $1.00 a share; 100,000 shares authorized, Series A, junior preferred stock, none issued and
outstanding                               |  |               |          |   |                   |   |          |  
|Common stock  par value $1.00; 10,000,000 shares authorized, 4,985,104 and 4,937,233 shares issued; and 4,662,792 and
4,614,921 shares outstanding, respectively |  |               | 4,985     |   |                   |   | 4,937     |  
|Surplus                                                                                                                                                           |  |               | 44,455    |   |                   |   | 43,013    |  
|Undivided profits                                                                                                                                                 |  |               | 89,326    |   |                   |   | 86,194    |  
|Accumulated other comprehensive income                                                                                                                            |  |               | 5,400     |   |                   |   | 946       |  
|Directors stock-based deferred compensation plan (114,212 and 103,512 shares, respectively)                                                                      |  |               | (2,798    | ) |                   |   | (2,499    | )
|Treasury stock, at cost: 322,312 shares                                                                                                                           |  |               | (8,656    | ) |                   |   | (8,656    | )
|                                                                                                                                                                  |  |               |           |   |                   |   |           |  
|Total shareholders equity                                                                                                                                        |  |               | 132,712   |   |                   |   | 123,935   |  
|                                                                                                                                                                  |  |               |           |   |                   |   |           |  
|                                                                                                                                                                  |  |              
|Total liabilities & shareholders equity                                                                                                                          |  | $             | 1,456,731 |   |                   | $ | 1,417,244 |  
|                                                                                                                                                                  |  |               |           |   |                   |   |           |  

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



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Alliance Financial Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)



(In thousands, except per share data)



|                                                                           |  |                           |        |      |                         |        |      |  |      |        |  |   |        |  
|-------------------------------------------------------------------------- |  | ------------------------- | ------ | ---- | ----------------------- | ------ | ---- |  | ---- | ------ |  | - | ------ | -
|                                                                           |  | Three months
endedJune 30 |        |      | Six months
endedJune 30 |       
|                                                                           |  | 2010                      |        | 2009 |                         |        | 2010 |  | 2009 |       
|                                                                           |  |                           |        |     
|Interest income:                                                           |  |                           |        |      |                         |        |      |  |      |        |  |   |        |  
|Interest and fees on loans and leases                                      |  | $                         | 11,632 |      | $                       | 12,503 |      |  | $    | 23,453 |  | $ | 25,188 |  
|Federal funds sold and interest bearing deposits                           |  |                           | 1      |      |                         | 5      |      |  |      | 3      |  |   | 14     |  
|Securities                                                                 |  |                           | 3,745  |      |                         | 3,367  |      |  |      | 7,378  |  |   | 6,562  |  
|                                                                           |  |                           |        |      |                         |        |      |  |      |        |  |   |        |  
|Total interest income                                                      |  |                           | 15,378 |      |                         | 15,875 |      |  |      | 30,834 |  |   | 31,764 |  
|                                                                           |  |                           |        |     
|Interest expense:                                                          |  |                           |        |      |                         |        |      |  |      |        |  |   |        |  
|Deposits:                                                                  |  |                           |        |      |                         |        |      |  |      |        |  |   |        |  
|Savings accounts                                                           |  |                           | 97     |      |                         | 117    |      |  |      | 203    |  |   | 234    |  
|Money market accounts                                                      |  |                           | 729    |      |                         | 844    |      |  |      | 1,502  |  |   | 1,807  |  
|Time accounts                                                              |  |                           | 1,923  |      |                         | 2,467  |      |  |      | 3,894  |  |   | 5,176  |  
|NOW accounts                                                               |  |                           | 129    |      |                         | 134    |      |  |      | 272    |  |   | 284    |  
|                                                                           |  |                           |        |      |                         |        |      |  |      |        |  |   |        |  
|Total deposits                                                             |  |                           | 2,878  |      |                         | 3,562  |      |  |      | 5,871  |  |   | 7,501  |  
|Borrowings:                                                                |  |                           |        |      |                         |        |      |  |      |        |  |   |        |  
|Repurchase agreements                                                      |  |                           | 200    |      |                         | 229    |      |  |      | 403    |  |   | 480    |  
|FHLB advances                                                              |  |                           | 951    |      |                         | 1,249  |      |  |      | 1,936  |  |   | 2,648  |  
|Junior subordinated obligations issued to unconsolidated subsidiary trusts |  |                           | 159    |      |                         | 213    |      |  |      | 313    |  |   | 468    |  
|                                                                           |  |                           |        |      |                         |        |      |  |      |        |  |   |        |  
|Total interest expense                                                     |  |                           | 4,188  |      |                         | 5,253  |      |  |      | 8,523  |  |   | 11,097 |  
|                                                                           |  |                           |        |     
|Net interest income                                                        |  |                           | 11,190 |      |                         | 10,622 |      |  |      | 22,311 |  |   | 20,667 |  
|Provision for credit losses                                                |  |                           | 1,095  |      |                         | 1,800  |      |  |      | 2,190  |  |   | 3,550  |  
|                                                                           |  |                           |        |      |                         |        |      |  |      |        |  |   |        |  
|Net interest income after provision for credit losses                      |  |                           | 10,095 |      |                         | 8,822  |      |  |      | 20,121 |  |   | 17,117 |  
|                                                                           |  |                           |        |     
|Non-interest income:                                                       |  |                           |        |      |                         |        |      |  |      |        |  |   |        |  
|Investment management income                                               |  |                           | 1,828  |      |                         | 1,785  |      |  |      | 3,635  |  |   | 3,546  |  
|Service charges on deposit accounts                                        |  |                           | 1,146  |      |                         | 1,268  |      |  |      | 2,196  |  |   | 2,461  |  
|Card-related fees                                                          |  |                           | 652    |      |                         | 567    |      |  |      | 1,243  |  |   | 1,088  |  
|Insurance agency income                                                    |  |                           | 420    |      |                         | 374    |      |  |      | 766    |  |   | 689    |  
|Income from bank-owned life insurance                                      |  |                           | 266    |      |                         | 252    |      |  |      | 535    |  |   | 499    |  
|Gain on the sale of loans                                                  |  |                           | 221    |      |                         | 250    |      |  |      | 414    |  |   | 275    |  
|Gain on sale of securities available-for-sale                              |  |                           |       |      |                         |       |      |  |      |       |  |   | 1,015  |  
|Other non-interest income                                                  |  |                           | 326    |      |                         | 270    |      |  |      | 631    |  |   | 553    |  
|                                                                           |  |                           |        |      |                         |        |      |  |      |        |  |   |        |  
|Total non-interest income                                                  |  |                           | 4,859  |      |                         | 4,766  |      |  |      | 9,420  |  |   | 10,126 |  
|                                                                           |  |                           |        |     
|Non-interest expense:                                                      |  |                           |        |      |                         |        |      |  |      |        |  |   |        |  
|Salaries and employee benefits                                             |  |                           | 5,370  |      |                         | 4,721  |      |  |      | 10,939 |  |   | 9,421  |  
|Occupancy and equipment expense                                            |  |                           | 1,840  |      |                         | 1,787  |      |  |      | 3,680  |  |   | 3,551  |  
|Communication expense                                                      |  |                           | 157    |      |                         | 196    |      |  |      | 333    |  |   | 387    |  
|Office supplies and postage expense                                        |  |                           | 300    |      |                         | 301    |      |  |      | 569    |  |   | 612    |  
|Marketing expense                                                          |  |                           | 391    |      |                         | 248    |      |  |      | 684    |  |   | 499    |  
|Amortization of intangible assets                                          |  |                           | 290    |      |                         | 387    |      |  |      | 580    |  |   | 775    |  
|Professional fees                                                          |  |                           | 829    |      |                         | 754    |      |  |      | 1,569  |  |   | 1,431  |  
|FDIC insurance premium                                                     |  |                           | 404    |      |                         | 1,039  |      |  |      | 806    |  |   | 1,386  |  
|Other non-interest expense                                                 |  |                           | 1,382  |      |                         | 1,466  |      |  |      | 2,765  |  |   | 2,904  |  
|                                                                           |  |                           |        |      |                         |        |      |  |      |        |  |   |        |  
|Total non-interest expense                                                 |  |                           | 10,963 |      |                         | 10,899 |      |  |      | 21,925 |  |   | 20,966 |  
|                                                                           |  |                           |        |     
|Income before income tax expense                                           |  |                           | 3,991  |      |                         | 2,689  |      |  |      | 7,616  |  |   | 6,277  |  
|Income tax expense                                                         |  |                           | 999    |      |                         | 653    |      |  |      | 1,875  |  |   | 1,284  |  
|                                                                           |  |                           |        |      |                         |        |      |  |      |        |  |   |        |  
|Net income                                                                 |  | $                         | 2,992  |      | $                       | 2,036  |      |  | $    | 5,741  |  | $ | 4,993  |  
|Dividend and accretion of discount on preferred stock                      |  |                           |       |      |                         | (726   | )    |  |      |       |  |   | (1,084 | )
|                                                                           |  |                           |        |      |                         |        |      |  |      |        |  |   |        |  
|Net income available to common shareholders                                |  | $                         | 2,992  |      | $                       | 1,310  |      |  | $    | 5,741  |  | $ | 3,909  |  
|                                                                           |  |                           |        |      |                         |        |      |  |      |        |  |   |        |  
|                                                                           |  |                           |        |     
|Net income per common share:                                               |  |                           |        |      |                         |        |      |  |      |        |  |   |        |  
|Basic earnings per common share                                            |  | $                         | 0.64   |      | $                       | 0.29   |      |  | $    | 1.24   |  | $ | 0.85   |  
|Diluted earnings per common share                                          |  | $                         | 0.64   |      | $                       | 0.28   |      |  | $    | 1.23   |  | $ | 0.85   |  
|Cash dividends declared per share                                          |  | $                         | 0.28   |      | $                       | 0.26   |      |  | $    | 0.56   |  | $ | 0.52   |  

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



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##### Table of Contents

Alliance Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders Equity (Unaudited)



(In thousands, except per share data)



|                                                                                     |  |                                   |   |  |                |        |             |   |       |         |  |   |                  |   |  |                                     |        |                     |  |   |                        |  |   |                         |   |  |       |         |   |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------ |  | --------------------------------- | - |  | -------------- | ------ | ----------- | - | ----- | ------- |  | - | ---------------- | - |  | ----------------------------------- | ------ | ------------------- |  | - | ---------------------- |  | - | ----------------------- | - |  | ----- | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                     |  | Issued
andOutstandingCommonShares |   |  | PreferredStock |        | CommonStock |   |       | Surplus |  |   | UndividedProfits |   |  | AccumulatedOtherComprehensiveIncome |        | TreasuryStockCommon |  |   | TreasuryStockPreferred |  |   | DirectorsDeferredStock |   |  | Total |        
|                                                                                     |  |                                   |   |  |                |        |             |   |       |        
|Balance at January 1, 2009                                                           |  | 4,578,910                         |   |  | $              | 26,331 |             | $ | 4,901 |         |  | $ | 41,922           |   |  | $                                   | 81,110 |                     |  | $ | 971                    |  | $ | (8,656                  | ) |  | $     |        |   |  | $ | (2,098 | ) |  | $ | 144,481 |  
|                                                                                     |  |                                   |   |  |                |        |             |   |       |         |  |   |                  |   |  |                                     |        |                     |  |   |                        |  |   |                         |   |  |       |         |   |  |   |        |   |  |   |         |  
|Comprehensive income:                                                                |  |                                   |   |  |                |        |             |   |       |         |  |   |                  |   |  |                                     |        |                     |  |   |                        |  |   |                         |   |  |       |         |   |  |   |        |   |  |   |         |  
|Net income                                                                           |  |                                  |   |  |                |       |             |   |      |         |  |   |                 |   |  |                                     | 4,993  |                     |  |   |                       |  |   |                        |   |  |       |        |   |  |   |       |   |  |   | 4,993   |  
|Other comprehensive income, net of taxes:                                            |  |                                   |   |  |                |        |             |   |       |         |  |   |                  |   |  |                                     |        |                     |  |   |                        |  |   |                         |   |  |       |         |   |  |   |        |   |  |   |         |  
|Change in unrealized appreciation in available-for-sale securities (net of tax)      |  |                                  |   |  |                |       |             |   |      |         |  |   |                 |   |  |                                     |       |                     |  |   | 408                    |  |   |                        |   |  |       |        |   |  |   |       |   |  |   | 408     |  
|Change in accumulated unrealized losses and prior service costs for retirement plans |  |                                  |   |  |                |       |             |   |      |         |  |   |                 |   |  |                                     |       |                     |  |   | 8                      |  |   |                        |   |  |       |        |   |  |   |       |   |  |   | 8       |  
|                                                                                     |  |                                   |   |  |                |        |             |   |       |         |  |   |                  |   |  |                                     |        |                     |  |   |                        |  |   |                         |   |  |       |         |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                           |  |                                  |   |  |                |       |             |   |      |         |  |   |                 |   |  |                                     | 4,993  |                     |  |   | 416                    |  |   |                        |   |  |       |         |   |  |   |       |   |  |   | 5,409   |  
|                                                                                     |  |                                   |   |  |                |        |             |   |       |         |  |   |                  |   |  |                                     |        |                     |  |   |                        |  |   |                         |   |  |       |         |   |  |   |        |   |  |   |         |  
|Redemption of preferred stock                                                        |  |                                  |   |  |                |       |             |   |      |         |  |   |                 |   |  |                                     |       |                     |  |   |                       |  |   |                        |   |  |       | (26,918 | ) |  |   |       |   |  |   | (26,918 | )
|Accretion of preferred stock discount                                                |  |                                  |   |  |                | 587    |             |   |      |         |  |   |                 |   |  |                                     | (587   | )                   |  |   |                       |  |   |                        |   |  |       |        |   |  |   |       |   |  |   |        |  
|Issuance of restricted stock                                                         |  | 11,850                            |   |  |                |       |             |   | 12    |         |  |   | (12              | ) |  |                                     |       |                     |  |   |                       |  |   |                        |   |  |       |        |   |  |   |       |   |  |   |        |  
|Forfeiture of restricted stock                                                       |  | (5,100                            | ) |  |                |       |             |   | (5    | )       |  |   | (42              | ) |  |                                     |       |                     |  |   |                       |  |   |                        |   |  |       |        |   |  |   |       |   |  |   | (47     | )
|Amortization of restricted stock                                                     |  |                                  |   |  |                |       |             |   |      |         |  |   | 194              |   |  |                                     |       |                     |  |   |                       |  |   |                        |   |  |       |        |   |  |   |       |   |  |   | 194     |  
|Stock options exercised                                                              |  | 16,818                            |   |  |                |       |             |   | 17    |         |  |   | 399              |   |  |                                     |       |                     |  |   |                       |  |   |                        |   |  |       |        |   |  |   |        |   |  |   | 416     |  
|Tax benefit of stock-based compensation                                              |  |                                  |   |  |                |       |             |   |      |         |  |   | 20               |   |  |                                     |       |                     |  |   |                       |  |   |                        |   |  |       |        |   |  |   |       |   |  |   | 20      |  
|Cash dividend $0.52 per common share                                                 |  |                                  |   |  |                |       |             |   |      |         |  |   |                 |   |  |                                     | (2,390 | )                   |  |   |                       |  |   |                        |   |  |       |        |   |  |   |       |   |  |   | (2,390  | )
|Preferred stock dividend                                                             |  |                                  |   |  |                |       |             |   |      |         |  |   |                 |   |  |                                     | (497   | )                   |  |   |                       |  |   |                        |   |  |       |        |   |  |   |       |   |  |   | (497    | )
|Repurchase of warrant                                                                |  |                                  |   |  |                |       |             |   |      |         |  |   | (593             | ) |  |                                     | (307   | )                   |  |   |                       |  |   |                        |   |  |       |        |   |  |   |       |   |  |   | (900    | )
|Directors deferred stock plan purchase                                              |  |                                  |   |  |                |       |             |   |      |         |  |   | 258              |   |  |                                     |       |                     |  |   |                       |  |   |                        |   |  |       |        |   |  |   | (258   | ) |  |   |        |  
|                                                                                     |  |                                   |   |  |                |        |             |   |       |         |  |   |                  |   |  |                                     |        |                     |  |   |                        |  |   |                         |   |  |       |         |   |  |   |        |   |  |   |         |  
|Balance at June 30, 2009                                                             |  | 4,602,478                         |   |  | $              | 26,918 |             | $ | 4,925 |         |  | $ | 42,146           |   |  | $                                   | 82,322 |                     |  | $ | 1,387                  |  | $ | (8,656                  | ) |  | $     | (26,918 | ) |  | $ | (2,356 | ) |  | $ | 119,768 |  
|                                                                                     |  |                                   |   |  |                |        |             |   |       |         |  |   |                  |   |  |                                     |        |                     |  |   |                        |  |   |                         |   |  |       |         |   |  |   |        |   |  |   |         |  
|                                                                                     |  |                                   |   |  |                |        |             |   |       |        
|Balance at January 1, 2010                                                           |  | 4,614,921                         |   |  | $              |       |             | $ | 4,937 |         |  | $ | 43,013           |   |  | $                                   | 86,194 |                     |  | $ | 946                    |  | $ | (8,656                  | ) |  |       |        |   |  | $ | (2,499 | ) |  | $ | 123,935 |  
|                                                                                     |  |                                   |   |  |                |        |             |   |       |         |  |   |                  |   |  |                                     |        |                     |  |   |                        |  |   |                         |   |  |       |         |   |  |   |        |   |  |   |         |  
|Comprehensive income:                                                                |  |                                   |   |  |                |        |             |   |       |         |  |   |                  |   |  |                                     |        |                     |  |   |                        |  |   |                         |   |  |       |         |   |  |   |        |   |  |   |         |  
|Net income                                                                           |  |                                  |   |  |                |       |             |   |      |         |  |   |                 |   |  |                                     | 5,741  |                     |  |   |                       |  |   |                        |   |  |       |        |   |  |   |       |   |  |   | 5,741   |  
|Other comprehensive income, net of taxes:                                            |  |                                   |   |  |                |        |             |   |       |         |  |   |                  |   |  |                                     |        |                     |  |   |                        |  |   |                         |   |  |       |         |   |  |   |        |   |  |   |         |  
|Change in unrealized appreciation in available-for-sale securities (net of tax)      |  |                                  |   |  |                |       |             |   |      |         |  |   |                 |   |  |                                     |       |                     |  |   | 4,399                  |  |   |                        |   |  |       |        |   |  |   |       |   |  |   | 4,399   |  
|Change in accumulated unrealized losses and prior service costs for retirement plans |  |                                  |   |  |                |       |             |   |      |         |  |   |                 |   |  |                                     |       |                     |  |   | 55                     |  |   |                        |   |  |       |        |   |  |   |       |   |  |   | 55      |  
|                                                                                     |  |                                   |   |  |                |        |             |   |       |         |  |   |                  |   |  |                                     |        |                     |  |   |                        |  |   |                         |   |  |       |         |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                           |  |                                  |   |  |                |       |             |   |      |         |  |   |                 |   |  |                                     | 5,741  |                     |  |   | 4,454                  |  |   |                        |   |  |       |        |   |  |   |       |   |  |   | 10,195  |  
|                                                                                     |  |                                   |   |  |                |        |             |   |       |         |  |   |                  |   |  |                                     |        |                     |  |   |                        |  |   |                         |   |  |       |         |   |  |   |        |   |  |   |         |  
|Retirement of common stock                                                           |  | (629                              | ) |  |                |       |             |   | (1    | )       |  |   | (16              | ) |  |                                     |       |                     |  |   |                       |  |   |                        |   |  |       |        |   |  |   |       |   |  |   | (17     | )
|Amortization of restricted stock                                                     |  |                                  |   |  |                |       |             |   |      |         |  |   | 155              |   |  |                                     |       |                     |  |   |                       |  |   |                        |   |  |       |        |   |  |   |       |   |  |   | 155     |  
|Stock options exercised                                                              |  | 48,500                            |   |  |                |       |             |   | 49    |         |  |   | 848              |   |  |                                     |       |                     |  |   |                       |  |   |                        |   |  |       |        |   |  |   |       |   |  |   | 897     |  
|Tax benefit of stock-based compensation                                              |  |                                  |   |  |                |       |             |   |      |         |  |   | 156              |   |  |                                     |       |                     |  |   |                       |  |   |                        |   |  |       |        |   |  |   |       |   |  |   | 156     |  
|Cash dividend $0.56 per common share                                                 |  |                                  |   |  |                |       |             |   |      |         |  |   |                 |   |  |                                     | (2,609 | )                   |  |   |                       |  |   |                        |   |  |       |        |   |  |   |       |   |  |   | (2,609  | )
|Directors deferred stock plan purchase                                              |  |                                  |   |  |                |       |             |   |      |         |  |   | 299              |   |  |                                     |       |                     |  |   |                       |  |   |                        |   |  |       |        |   |  |   | (299   | ) |  |   |        |  
|                                                                                     |  |                                   |   |  |                |        |             |   |       |         |  |   |                  |   |  |                                     |        |                     |  |   |                        |  |   |                         |   |  |       |         |   |  |   |        |   |  |   |         |  
|Balance at June 30, 2010                                                             |  | 4,662,792                         |   |  | $              |       |             | $ | 4,985 |         |  | $ | 44,455           |   |  | $                                   | 89,326 |                     |  | $ | 5,400                  |  | $ | (8,656                  | ) |  | $     |        |   |  | $ | (2,798 | ) |  | $ | 132,712 |  
|                                                                                     |  |                                   |   |  |                |        |             |   |       |         |  |   |                  |   |  |                                     |        |                     |  |   |                        |  |   |                         |   |  |       |         |   |  |   |        |   |  |   |         |  

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



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##### Table of Contents

Alliance Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flow (Unaudited)



(In thousands, except per share data)



|                                                                                                                  |      |                           |         |      |  |   |          |  
|----------------------------------------------------------------------------------------------------------------- | ---- | ------------------------- | ------- | ---- |  | - | -------- | -
|                                                                                                                  |      | Six months ended June 30, |        
|                                                                                                                  | 2010 |                           |         | 2009 | 
|Operating Activities:                                                                                             |      |                           |         |      |  |   |          |  
|Net Income                                                                                                        |      | $                         | 5,741   |      |  | $ | 4,993    |  
|                                                                                                                  |      |                          
|Adjustments to reconcile net income to net cash provided by operating activities:                                 |      |                           |         |      |  |   |          |  
|Provision for credit losses                                                                                       |      |                           | 2,190   |      |  |   | 3,550    |  
|Depreciation expense                                                                                              |      |                           | 1,168   |      |  |   | 1,209    |  
|Increase in surrender value of life insurance                                                                     |      |                           | (535    | )    |  |   | (499     | )
|(Benefit) Provision for deferred income taxes                                                                     |      |                           | (112    | )    |  |   | 525      |  
|Amortization of investment security discounts and premiums, net                                                   |      |                           | 1,114   |      |  |   | 508      |  
|Net gain on sale of securities available-for-sale                                                                 |      |                           |        |      |  |   | (1,015   | )
|Net gain on sale of premises and equipment                                                                        |      |                           | (11     | )    |  |   | (7       | )
|Proceeds from the sale of loans and leases held-for-sale                                                          |      |                           | 21,052  |      |  |   | 17,353   |  
|Origination of loans held-for-sale                                                                                |      |                           | (20,531 | )    |  |   | (18,757  | )
|Gain on sale of loans held-for-sale                                                                               |      |                           | (414    | )    |  |   | (275     | )
|Gain on foreclosed real estate                                                                                    |      |                           | (41     | )    |  |   | (11      | )
|Amortization of capitalized servicing rights                                                                      |      |                           | 138     |      |  |   | 158      |  
|Amortization of intangible assets                                                                                 |      |                           | 580     |      |  |   | 775      |  
|Restricted stock expense, net                                                                                     |      |                           | 155     |      |  |   | 147      |  
|Amortization of prepaid FDIC insurance premium                                                                    |      |                           | 742     |      |  |   |         |  
|Change in other assets and liabilities                                                                            |      |                           | (1,077  | )    |  |   | (332     | )
|                                                                                                                  |      |                           |         |      |  |   |          |  
|Net cash provided by operating activities                                                                         |      |                           | 10,159  |      |  |   | 8,322    |  
|                                                                                                                  |      |                          
|Investing Activities:                                                                                             |      |                           |         |      |  |   |          |  
|Proceeds from maturities, redemptions, calls and principal repayments of investment securities available-for-sale |      |                           | 54,617  |      |  |   | 91,413   |  
|Proceeds from sales of investment securities available-for-sale                                                   |      |                           |        |      |  |   | 33,926   |  
|Purchase of investment securities available-for-sale                                                              |      |                           | (93,210 | )    |  |   | (194,508 | )
|Purchase of FHLB and FRB stock                                                                                    |      |                           | (7,272  | )    |  |   | (11,772  | )
|Redemption of FHLB stock                                                                                          |      |                           | 7,533   |      |  |   | 12,614   |  
|Net increase in loans and leases                                                                                  |      |                           | (2,392  | )    |  |   | (29,018  | )
|Purchases of premises and equipment                                                                               |      |                           | (623    | )    |  |   | (554     | )
|Proceeds from the sale of premises and equipment                                                                  |      |                           | 53      |      |  |   | 17       |  
|Proceeds from disposition of foreclosed assets                                                                    |      |                           | 241     |      |  |   | 95       |  
|                                                                                                                  |      |                           |         |      |  |   |          |  
|Net cash used in investing activities                                                                             |      |                           | (41,053 | )    |  |   | (97,787  | )
|                                                                                                                  |      |                          
|Financing Activities:                                                                                             |      |                           |         |      |  |   |          |  
|Net increase in demand deposits, NOW and savings accounts                                                         |      |                           | 51,307  |      |  |   | 72,735   |  
|Net (decrease) increase in time deposits                                                                          |      |                           | (8,808  | )    |  |   | 78,434   |  
|Net decrease in short-term borrowings                                                                             |      |                           | (1,308  | )    |  |   | (31,442  | )
|Payments on long-term borrowings                                                                                  |      |                           | (10,000 | )    |  |   | (20,000  | )
|Proceeds from the exercise of stock options                                                                       |      |                           | 897     |      |  |   | 416      |  
|Retirement of common stock                                                                                        |      |                           | (17     | )    |  |   |         |  
|Tax benefit of stock-based compensation                                                                           |      |                           | 156     |      |  |   | 20       |  
|Purchase of shares for directors deferred stock-based plan                                                       |      |                           | (299    | )    |  |   | (258     | )
|Redemption of preferred stock                                                                                     |      |                           |        |      |  |   | (26,918  | )
|Repurchase of warrant                                                                                             |      |                           |        |      |  |   | (900     | )
|Cash dividends paid to common shareholders                                                                        |      |                           | (2,595  | )    |  |   | (2,385   | )
|Cash dividends paid to preferred shareholders                                                                     |      |                           |        |      |  |   | (537     | )
|                                                                                                                  |      |                           |         |      |  |   |          |  
|Net cash provided by financing activities                                                                         |      |                           | 29,333  |      |  |   | 69,165   |  
|                                                                                                                  |      |                           |         |      |  |   |          |  
|Net decrease in cash and cash equivalents                                                                         |      |                           | (1,561  | )    |  |   | (20,300  | )
|Cash and cash equivalents at beginning of period                                                                  |      |                           | 26,696  |      |  |   | 48,090   |  
|                                                                                                                  |      |                           |         |      |  |   |          |  
|Cash and cash equivalents at end of period                                                                        |      | $                         | 25,135  |      |  | $ | 27,790   |  
|                                                                                                                  |      |                           |         |      |  |   |          |  
|                                                                                                                  |      |                          
|Supplemental Disclosures of Cash Flow Information:                                                                |      |                           |         |      |  |   |          |  
|Interest received during the period                                                                               |      | $                         | 30,581  |      |  | $ | 31,561   |  
|Interest paid during the period                                                                                   |      |                           | 8,818   |      |  |   | 12,051   |  
|Income taxes                                                                                                      |      |                           | 1,773   |      |  |   | 1,854    |  
|Non-cash investing activities:                                                                                    |      |                           |         |      |  |   |          |  
|Change in unrealized gain/loss on available-for-sale securities                                                   |      |                           | 7,132   |      |  |   | 665      |  
|Transfer of loans to other real estate and repossessed assets                                                     |      |                           | 92      |      |  |   | 134      |  
|Non-cash financing activities:                                                                                    |      |                           |         |      |  |   |          |  
|Common dividend declared and unpaid                                                                               |      |                           | 1,306   |      |  |   | 1,197    |  

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



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##### Table of Contents

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements



Nature of Operations

Alliance Financial Corporation (the Company or Alliance) is a financial holding company which owns and operates Alliance Bank,
N.A. (the Bank), Alliance Financial Capital Trust I, Alliance Financial Capital Trust II (collectively the Capital Trusts) and Ladds Agency, Inc., a multi-line insurance agency. The Company provides financial services
through the Bank subsidiary from 29 retail branches and customer service facilities in the New York counties of Cortland, Madison, Oneida, Onondaga, Oswego, and from a Trust Administration Center in Buffalo, NY. Primary services include commercial,
retail and municipal banking, consumer finance, mortgage financing and servicing, and investment management services. The Capital Trusts were formed for the purpose of issuing corporation-obligated mandatorily redeemable capital securities to
third-party investors and investing the proceeds from the sale of such capital securities solely in junior subordinated debt securities of the Company. The Bank has a substantially wholly-owned subsidiary, Alliance Preferred Funding Corp., which is
engaged in residential real estate activity, and a wholly-owned subsidiary, Alliance Leasing, Inc., which was engaged in commercial equipment financing activity in over thirty states until the third quarter of 2008, at which time Alliance Leasing,
Inc. ceased the origination of new leases.



|1. | Basis of Presentation and Significant Accounting Policies
|-- | ---------------------------------------------------------

The accompanying unaudited financial statements were prepared in accordance with the instructions for Form 10-Q and Regulation S-X and, therefore, do not
include information for footnotes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (US 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 Companys latest audited financial statements and notes thereto, together with Managements Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2009 and for the three-year period then ended,
included in Alliances Annual Report on Form 10-K for the year ended December 31, 2009 (the 2009 Annual Report). Accordingly, only material changes in the results of operations and financial condition are discussed in the
remainder of Part I. Certain amounts from prior year periods are reclassified, when necessary, to conform to the current period presentation.

All adjustments that in the opinion of management are necessary for a fair presentation of the financial statements have been included in the results of
operations for the six months ended June 30, 2010 and 2009.

Critical Accounting Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management has identified the allowance for
credit losses, income taxes, and the carrying value and subsequent annual impairment analysis of goodwill and intangible assets to be the accounting areas that require the most subjective and complex judgments, and as such could be the most subject
to revision as new information becomes available. Actual results could differ from those estimates.

Significant Accounting Policies

Securities

Alliance
classifies securities as held-to-maturity or available-for-sale at the time of purchase. Held-to-maturity securities are those that Alliance has the positive intent and ability to hold to maturity, and are reported at cost, adjusted for amortization
of premiums and accretion of discounts. Securities not classified as held-to-maturity are classified as available-for-sale and are reported at fair value, with net unrealized gains and losses reflected as a separate component of accumulated other
comprehensive income, net of taxes. None of Alliances securities have been classified as trading securities or held-to-maturity.

Gains
and losses on the sale of securities are based on the specific identification method. Premiums and discounts on securities are amortized and accreted into income using the interest method over the life of the security. Securities are reviewed
regularly for other than temporary impairment. Purchases and sales of securities are recognized on a trade-date basis.



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##### Table of Contents

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements





Loans and Leases

Loans and leases are stated at unpaid principal balances less the allowance for credit losses, unearned interest income and net deferred loan origination
fees and costs. Interest on loans is based upon the principal amount outstanding. Interest on loans is accrued except when in managements opinion the collectability of interest is doubtful, at which time the accrual of interest on the loan is
discontinued. Loan and lease origination fees and certain direct origination costs are deferred and the net amount is amortized as a yield adjustment over the life of the loan or lease.

Operating leases are stated at cost of the equipment less depreciation. Equipment on operating leases is depreciated on a straight-line basis to its
estimated residual value over the lease term. Operating lease income is recognized on a straight-line basis over the term of the lease. Lease financings, included in portfolio loans on the consolidated balance sheet consist of direct financing
leases of commercial equipment, primarily computers and office equipment, manufacturing equipment, commercial truck and trailers, and medical equipment. Income attributable to finance leases is initially recorded as unearned income and subsequently
recognized as finance income at level rates of return over the term of the leases. The recorded residual values of Alliances leased assets are estimated at the inception of the lease to be the expected fair market value of the assets at the
end of the lease term. Alliance reviews commercial lease residual values at least annually and recognizes residual value impairments deemed to be other than temporary. In accordance with U.S. generally accepted accounting principles, anticipated
increases in specific future residual values are not recognized before realization. Anticipated decreases in specific future residual values that are considered to be other than temporary are recognized immediately.

Allowance for Credit Losses

The
allowance for credit losses represents managements best estimate of probable incurred credit losses in Alliances loan and lease portfolio. Managements quarterly evaluation of the allowance for credit losses is a comprehensive
analysis that builds a total allowance by evaluating the probable incurred losses within each loan and lease type, or pool, of similar loans and leases. Alliance uses a general allocation methodology for all residential and consumer loan pools. This
methodology estimates an allowance for each pool based on the average loss rate for the time period that includes the current year and two full prior years. The average loss rate is adjusted to reflect the expected impact that current trends
regarding loan growth, delinquency, losses, economic conditions, loan concentrations, policy changes, experience and ability of lending personnel, and current interest rates have. For commercial loan and lease pools, Alliance establishes a specific
allocation for all loans and leases classified as being impaired in excess of $200,000, which have been risk rated under Alliances risk rating system as substandard, doubtful, or loss. For all other commercial loans and leases, Alliance uses
the general allocation methodology that establishes an allowance to estimate the probable incurred loss for each risk-rating category. The general allocation methodology for commercial loans and leases considers the same factors that are considered
when evaluating residential mortgage and consumer loan pools. The combination of using both the general and specific allocation methodologies reflects managements best estimate of the probable incurred credit losses in Alliances loan and
lease portfolio.

A loan or lease is considered impaired, based on current information and events, if it is probable that Alliance will be
unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan or lease agreement. The measurement of impaired loans and leases is generally discounted at the historical effective interest
rate, except that all collateral-dependent loans and leases are measured for impairment based on fair value of the collateral. Large groups of smaller balance homogenous loans, such as consumer and residential real estate loans less than $200,000,
are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

Loans are charged
off when they are considered a loss regardless of the delinquency status. From a delinquency standpoint, the policy of Alliance is to charge off loans when they are 120 days past due unless extenuating circumstances are documented that attest to the
ability to collect the loan. Special circumstances to include fraudulent loans and loans in bankruptcy will be charged off no later than 90 days of discovery or 120 days delinquent, whichever is shorter. In lieu of charging off the entire loan
balance, loans with collateral may be written down to the value of the collateral, less cost to sell, if foreclosure or repossession of collateral is assured and is in process.



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##### Table of Contents

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements





Directors Stock-Based Deferral Plan

In accordance with Accounting Standards Codification (ASC) Topic 710-10-05-08, Deferred Compensation-Rabbi Trusts, the stock held
in the trust is classified in equity similar to the manner in which treasury stock is classified.

Adoption of New Accounting Standards

In June 2009, FASB issued ASC Topic 860-10-65-3, Accounting for Transfers of Financial Assets - An Amendment of FASB Statement
No. 140. The new accounting requirement amends previous guidance relating to the transfers of financial assets and eliminates the concept of a qualifying special purpose entity. This statement must be applied as of the beginning of each
reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. This statement must be applied to
transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose
entities should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. Additionally, the disclosure provisions of this statement were also amended and apply to
transfers that occurred both before and after the effective date of this statement. The adoption did not have a material impact on Alliances consolidated financial position, results of operations or cash flows.

ASC Topic 810-10-65-2, Amendments to FASB Interpretation No. 46(R), which amended guidance for consolidation of variable interest
entities by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the
power to direct the activities of a variable interest entity that most significantly impact the entitys economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity.
This statement also requires additional disclosures about an enterprises involvement in variable interest entities. This statement will be effective as of the beginning of each reporting entitys first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Early adoption is prohibited. The adoption did not have a material impact on Alliances
consolidated financial position, results of operations or cash flows.

Newly Issued Not Yet Effective Standards

On July 21, 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for
Credit Losses, which requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit
quality of loan and lease receivables. Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be
presented by class of financing receivable. Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings will also be required. The disclosures are to be presented at the level of
disaggregation that management uses when assessing and monitoring the portfolios risk and performance. This ASU is effective for interim and annual reporting periods after December 15, 2010. Alliance will include these disclosures in
the notes to the financial statements upon adoption of this ASU.



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##### Table of Contents

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements





|2. | Securities
|-- | ----------

The amortized cost and
estimated fair value of securities for the dates indicated (in thousands):



|                                                      |  |                   |         |                      |   |                       |  |                     |       |  |   |        
|----------------------------------------------------- |  | ----------------- | ------- | -------------------- | - | --------------------- |  | ------------------- | ----- |  | - | -------
|                                                      |  | June 30, 2010    
|                                                      |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | EstimatedFair
Value
|Debt Securities:                                      |  |                   |         |                      |   |                       |  |                     |       |  |   |        
|U.S. Treasury obligations                             |  | $                 | 100     |                      | $ |                      |  | $                   |      |  | $ | 100    
|Obligations of U.S. government-sponsored corporations |  |                   | 5,139   |                      |   | 261                   |  |                     |      |  |   | 5,400  
|Obligations of states and political subdivisions      |  |                   | 69,238  |                      |   | 2,363                 |  |                     | 15    |  |   | 71,586 
|Mortgage-backed securities - residential              |  |                   | 317,569 |                      |   | 8,963                 |  |                     | 127   |  |   | 326,405
|                                                      |  |                   |         |                      |   |                       |  |                     |       |  |   |        
|Total debt securities                                 |  |                   | 392,046 |                      |   | 11,587                |  |                     | 142   |  |   | 403,491
|Stock Investments:                                    |  |                   |         |                      |   |                       |  |                     |       |  |   |        
|Equity securities                                     |  |                   | 1,958   |                      |   | 301                   |  |                     | 4     |  |   | 2,255  
|Mutual Funds                                          |  |                   | 1,000   |                      |   | 33                    |  |                     | 10    |  |   | 1,023  
|                                                      |  |                   |         |                      |   |                       |  |                     |       |  |   |        
|Total stock investments                               |  |                   | 2,958   |                      |   | 334                   |  |                     | 14    |  |   | 3,278  
|                                                      |  |                   |         |                      |   |                       |  |                     |       |  |   |        
|Total available-for-sale                              |  | $                 | 395,004 |                      | $ | 11,921                |  | $                   | 156   |  | $ | 406,769
|                                                      |  |                   |         |                      |   |                       |  |                     |       |  |   |        
|                                                      | 
|                                                      |  | December 31, 2009
|                                                      |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | EstimatedFair Value
|Debt Securities:                                      |  |                   |         |                      |   |                       |  |                     |       |  |   |        
|U.S. Treasury obligations                             |  | $                 | 100     |                      | $ | 1                     |  | $                   |      |  | $ | 101    
|Obligations of U.S. government-sponsored corporations |  |                   | 5,864   |                      |   | 265                   |  |                     |      |  |   | 6,129  
|Obligations of states and political subdivisions      |  |                   | 75,104  |                      |   | 2,135                 |  |                     | 92    |  |   | 77,147 
|Mortgage-backed securities - residential              |  |                   | 273,499 |                      |   | 4,030                 |  |                     | 1,849 |  |   | 275,680
|                                                      |  |                   |         |                      |   |                       |  |                     |       |  |   |        
|Total debt securities                                 |  |                   | 354,567 |                      |   | 6,431                 |  |                     | 1,941 |  |   | 359,057
|Stock Investments:                                    |  |                   |         |                      |   |                       |  |                     |       |  |   |        
|Equity securities                                     |  |                   | 1,958   |                      |   | 153                   |  |                     | 7     |  |   | 2,104  
|Mutual funds                                          |  |                   | 1,000   |                      |   | 19                    |  |                     | 22    |  |   | 997    
|                                                      |  |                   |         |                      |   |                       |  |                     |       |  |   |        
|Total stock investments                               |  |                   | 2,958   |                      |   | 172                   |  |                     | 29    |  |   | 3,101  
|                                                      |  |                   |         |                      |   |                       |  |                     |       |  |   |        
|Total available-for-sale                              |  | $                 | 357,525 |                      | $ | 6,603                 |  | $                   | 1,970 |  | $ | 362,158
|                                                      |  |                   |         |                      |   |                       |  |                     |       |  |   |        

As of June 30, 2010 and December 31, 2009, the
mortgage-backed securities portfolio was comprised primarily of pass-through securities backed by conventional residential mortgages and guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, which in turn, are backed by the United States government.

At June 30, 2010 and December 31, 2009, securities with a carrying value of $383.2 million and $319.0 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 half of 2010. Alliance recognized gross gains on sales of securities of $1.0 million for the six months ended June 30, 2009. Taxes on these net realized gains at Alliances marginal rate were $393,000.

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.



|                                       |  |                |         |                      |   |        
|-------------------------------------- |  | -------------- | ------- | -------------------- | - | -------
|                                       |  | June 30, 2010 
|                                       |  | Amortized Cost |         | Estimated Fair Value
|Due in one year or less                |  | $              | 77,026  |                      | $ | 79,034 
|Due after one year through five years  |  |                | 191,627 |                      |   | 197,834
|Due after five years through ten years |  |                | 85,338  |                      |   | 87,804 
|Due after ten years                    |  |                | 38,055  |                      |   | 38,819 
|                                       |  |                |         |                      |   |        
|Total debt securities                  |  | $              | 392,046 |                      | $ | 403,491
|                                       |  |                |         |                      |   |        



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Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements





Securities with unrealized losses, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, at the dates indicated are as follows (in thousands):



|                                                 |  |                     |        |                       |   |                    |  |                       |       |                    |   |                       |  |   |        |  |   |      
|------------------------------------------------ |  | ------------------- | ------ | --------------------- | - | ------------------ |  | --------------------- | ----- | ------------------ | - | --------------------- |  | - | ------ |  | - | -----
|                                                 |  | June 30, 2010      
|                                                 |  | Less than 12 Months |        | 12 Months or Longer   |   | Total             
|Type of Security                                 |  | EstimatedFairValue  |        | GrossUnrealizedLosses |   | EstimatedFairValue |  | GrossUnrealizedLosses |       | EstimatedFairValue |   | GrossUnrealizedLosses
|Obligations of states and political subdivisions |  | $                   | 1,621  |                       | $ | 11                 |  | $                     | 201   |                    | $ | 4                     |  | $ | 1,822  |  | $ | 15   
|Mortgage-backed securities - residential         |  |                     | 7,573  |                       |   | 39                 |  |                       | 1,613 |                    |   | 88                    |  |   | 9,186  |  |   | 127  
|                                                 |  |                     |        |                       |   |                    |  |                       |       |                    |   |                       |  |   |        |  |   |      
|Subtotal, debt securities                        |  |                     | 9,194  |                       |   |                    |  |                       | 1,814 |                    |   | 92                    |  |   | 11,008 |  |   | 142  
|Equity securities                                |  |                     |       |                       |   |                   |  |                       | 19    |                    |   | 4                     |  |   | 19     |  |   | 4    
|Mutual funds                                     |  |                     |       |                       |   |                   |  |                       | 490   |                    |   | 10                    |  |   | 490    |  |   | 10   
|                                                 |  |                     |        |                       |   |                    |  |                       |       |                    |   |                       |  |   |        |  |   |      
|Total temporarily impaired securities            |  | $                   | 9,194  |                       | $ | 50                 |  | $                     | 2,323 |                    | $ | 106                   |  | $ | 11,517 |  | $ | 156  
|                                                 |  |                     |        |                       |   |                    |  |                       |       |                    |   |                       |  |   |        |  |   |      
|                                                 | 
|                                                 |  | December 31, 2009  
|                                                 |  | Less than 12 Months |        | 12 Months or Longer   |   | Total             
|Type of Security                                 |  | EstimatedFairValue  |        | GrossUnrealizedLosses |   | EstimatedFairValue |  | GrossUnrealizedLosses |       | EstimatedFairValue |   | GrossUnrealizedLosses
|Obligations of states and political subdivisions |  | $                   | 7,013  |                       | $ | 87                 |  | $                     | 200   |                    | $ | 5                     |  | $ | 7,213  |  | $ | 92   
|Mortgage-backed securities - residential         |  |                     | 82,274 |                       |   | 1,773              |  |                       | 1,747 |                    |   | 76                    |  |   | 84,021 |  |   | 1,849
|                                                 |  |                     |        |                       |   |                    |  |                       |       |                    |   |                       |  |   |        |  |   |      
|Subtotal debt securities                         |  |                     | 89,287 |                       |   | 1,860              |  |                       | 1,947 |                    |   | 81                    |  |   | 91,234 |  |   | 1,941
|Equity securities                                |  |                     |       |                       |   |                   |  |                       | 23    |                    |   | 7                     |  |   | 23     |  |   | 7    
|Mutual funds                                     |  |                     |       |                       |   |                   |  |                       | 478   |                    |   | 22                    |  |   | 478    |  |   | 22   
|                                                 |  |                     |        |                       |   |                    |  |                       |       |                    |   |                       |  |   |        |  |   |      
|Total temporarily impaired securities            |  | $                   | 89,287 |                       | $ | 1,860              |  | $                     | 2,448 |                    | $ | 110                   |  | $ | 91,735 |  | $ | 1,970
|                                                 |  |                     |        |                       |   |                    |  |                       |       |                    |   |                       |  |   |        |  |   |      

Management does not believe any individual unrealized loss as of
June 30, 2010 represents an other-than-temporary impairment. A total of 13 available-for-sale securities were in a continuous unrealized loss position for less than 12 months and 5 securities for 12 months or longer. The unrealized losses
relate primarily to securities issued by FNMA, GNMA, FHLMC, the State of New York and various political subdivisions within the State of New York. These unrealized losses are primarily attributable to changes in interest rates and other market
conditions. Alliance does not intend to sell these securities and does not believe it will be required to sell them prior to recovery of the amortized cost.



|3. | Loans and Leases
|-- | ----------------

Major classifications
of loans and leases at the dates indicated (in thousands):



|                            |  |              |         |   |                  |   |         |  
|--------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                            |  | June 30,2010 |         |   | December 31,2009 |  
|Residential real estate     |  | $            | 354,544 |   |                  | $ | 356,906 |  
|Commercial loans            |  |              | 122,714 |   |                  |   | 111,243 |  
|Commercial real estate      |  |              | 105,157 |   |                  |   | 96,753  |  
|Leases                      |  |              | 60,854  |   |                  |   | 76,224  |  
|Indirect auto loans         |  |              | 183,410 |   |                  |   | 184,947 |  
|Other consumer loans        |  |              | 91,073  |   |                  |   | 92,022  |  
|                            |  |              |         |   |                  |   |         |  
|                            |  |              | 917,752 |   |                  |   | 918,095 |  
|                            |  |             
|Less: Unearned income       |  |              | 6,452   |   |                  |   | 8,000   |  
|Net deferred loan costs     |  |              | 3,851   |   |                  |   | 4,067   |  
|                            |  |              |         |   |                  |   |         |  
|Total loans and leases      |  |              | 915,151 |   |                  |   | 914,162 |  
|Allowance for credit losses |  |              | (10,293 | ) |                  |   | (9,414  | )
|                            |  |              |         |   |                  |   |         |  
|Net loans and leases        |  | $            | 904,858 |   |                  | $ | 904,748 |  
|                            |  |              |         |   |                  |   |         |  



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##### Table of Contents

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements





Nonperforming loans and leases at the dates indicated are as follows (in thousands):



|                                                     |  |               |       |                   |   |      
|---------------------------------------------------- |  | ------------- | ----- | ----------------- | - | -----
|                                                     |  | June 30, 2010 |       | December 31, 2009
|                                                     |  |              
|Loans and leases 90 days past due and still accruing |  | $             |      |                   | $ |     
|Non-accrual loans and leases                         |  |               | 9,679 |                   |   | 8,582
|                                                     |  |               |       |                   |   |      
|Total nonperforming loans and leases                 |  | $             | 9,679 |                   | $ | 8,582
|                                                     |  |               |       |                   |   |      

As of June 30, 2010 and December 31, 2009, impaired loans
and leases totaled approximately $3.7 million and $3.6 million, respectively. The recorded investment in loans and leases considered impaired for which there was a related valuation allowance for impairment included in the allowance for credit
losses and the amount of such impairment allowance were $1.2 million and $695,000, respectively at June 30, 2010 and $908,000 and $332,000, respectively at December 31, 2009.

The following table summarizes changes in the allowance for credit losses arising from loans and leases charged off, recoveries on loans and leases
previously charged off and additions to the allowance, which have been charged to expense (in thousands):



|                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                      |  | Three months endedJune 30, |        |   | Six months
endedJune 30, |  
|                                                      |  | 2010                       |        |   | 2009                     |   |        | 2010 |  |   | 2009   |  
|                                                      |  | (In thousands)             |       
|Allowance for credit losses, beginning of period      |  | $                          | 9,717  |   |                          | $ | 9,707  |      |  | $ | 9,414  |   |  | $ | 9,161  |  
|                                                      |  |                            |        |  
|Loans and leases charged-off                          |  |                            | (724   | ) |                          |   | (2,315 | )    |  |   | (1,715 | ) |  |   | (3,698 | )
|Recoveries of loans and leases previously charged-off |  |                            | 205    |   |                          |   | 667    |      |  |   | 404    |   |  |   | 846    |  
|                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net loans and leases charged-off                      |  |                            | (519   | ) |                          |   | (1,648 | )    |  |   | (1,311 | ) |  |   | (2,852 | )
|                                                      |  |                            |        |  
|Provision for credit losses                           |  |                            | 1,095  |   |                          |   | 1,800  |      |  |   | 2,190  |   |  |   | 3,550  |  
|                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Allowance for credit losses, end of period            |  | $                          | 10,293 |   |                          | $ | 9,859  |      |  | $ | 10,293 |   |  | $ | 9,859  |  
|                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  



|4. | Deposits
|-- | --------

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



|                              |  |               |           |                   |   |          
|----------------------------- |  | ------------- | --------- | ----------------- | - | ---------
|                              |  | June 30, 2010 |           | December 31, 2009
|                              |  |              
|Non-interest-bearing checking |  | $             | 162,147   |                   | $ | 159,149  
|Interest-bearing checking     |  |               | 141,339   |                   |   | 130,368  
|Savings accounts              |  |               | 103,528   |                   |   | 94,524   
|Money market accounts         |  |               | 345,385   |                   |   | 317,051  
|Time accounts                 |  |               | 365,771   |                   |   | 374,579  
|                              |  |               |           |                   |   |          
|Total deposits                |  | $             | 1,118,170 |                   | $ | 1,075,671
|                              |  |               |           |                   |   |          



|5. | Earnings Per Share
|-- | ------------------

Alliance has granted
stock compensation awards with non-forfeitable dividend rights which are considered participating securities. As such, earnings per share is computed using the two-class method as required by ASC Topic 260-10-45. Basic earnings per common share is
computed by dividing net income allocated to common stock by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted earnings per common share includes the dilutive effect of
additional potential common shares from stock compensation awards and warrants, but excludes awards considered participating securities.



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##### Table of Contents

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements





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



|                                                                                                 |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  
|------------------------------------------------------------------------------------------------ |  | ---------------------------------- | --------- | - | -------------------------------- | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                                                 |  | For the three monthsended
June 30, |           |   | For the six months endedJune 30, |  
|                                                                                                 |  | 2010                               |           |   | 2009                             |   |           | 2010 |  |   | 2009      |  
|                                                                                                 |  |                                    |           |  
|Net income available to common shareholders                                                      |  | $                                  | 2,992     |   |                                  | $ | 1,310     |      |  | $ | 5,741     |   |  | $ | 3,909     |  
|Less: dividends and undistributed earnings allocated to unvested restricted shares               |  |                                    | (25       | ) |                                  |   | (26       | )    |  |   | (48       | ) |  |   | (79       | )
|                                                                                                 |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  
|Net earnings allocated to common shareholders                                                    |  | $                                  | 2,967     |   |                                  | $ | 1,284     |      |  | $ | 5,693     |   |  | $ | 3,830     |  
|                                                                                                 |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  
|                                                                                                 |  |                                    |           |  
|Weighted average common shares outstanding, including shares considered participating securities |  |                                    | 4,661,336 |   |                                  |   | 4,588,784 |      |  |   | 4,642,326 |   |  |   | 4,588,062 |  
|Less: average participating securities                                                           |  |                                    | (38,676   | ) |                                  |   | (93,345   | )    |  |   | (39,035   | ) |  |   | (93,930   | )
|                                                                                                 |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  
|Weighted average shares                                                                          |  |                                    | 4,622,660 |   |                                  |   | 4,495,439 |      |  |   | 4,603,291 |   |  |   | 4,494,132 |  
|                                                                                                 |  |                                    |           |  
|Net income per common share  basic                                                              |  | $                                  | 0.64      |   |                                  | $ | 0.29      |      |  | $ | 1.24      |   |  | $ | 0.85      |  
|                                                                                                 |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  
|                                                                                                 |  |                                    |           |  
|Diluted:                                                                                         |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  
|Net earnings allocated to common shareholders                                                    |  | $                                  | 2,967     |   |                                  | $ | 1,284     |      |  | $ | 5,693     |   |  | $ | 3,830     |  
|                                                                                                 |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  
|                                                                                                 |  |                                    |           |  
|Weighted average common shares outstanding for basic earnings per common share                   |  |                                    | 4,622,660 |   |                                  |   | 4,495,439 |      |  |   | 4,603,291 |   |  |   | 4,494,132 |  
|Incremental shares from assumed conversion of stock options and warrants                         |  |                                    | 21,019    |   |                                  |   | 23,388    |      |  |   | 26,050    |   |  |   | 13,112    |  
|                                                                                                 |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  
|Average common shares outstanding  diluted                                                      |  |                                    | 4,643,679 |   |                                  |   | 4,518,827 |      |  |   | 4,629,341 |   |  |   | 4,507,244 |  
|                                                                                                 |  |                                    |           |  
|Net income per common share  diluted                                                            |  | $                                  | 0.64      |   |                                  | $ | 0.28      |      |  | $ | 1.23      |   |  | $ | 0.85      |  
|                                                                                                 |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  

Dividends of $11,000 and $24,000 were paid on unvested shares with non-forfeitable dividend rights for the quarters ending
June 30, 2010 and 2009, respectively. Dividends of $22,000 and $48,000 for the six months ended June 30, 2010 and 2009, respectively, were paid on unvested shares with non-forfeitable dividend rights. There were no anti-dilutive stock
options for the three months and six months ended June 30, 2010. For the three months and six months ended June 30, 2009, there were 64,932 and 136,903 anti-dilutive stock options excluded from the diluted weighted average common share
calculations.



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##### Table of Contents

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements





|6. | Other Comprehensive Income
|-- | --------------------------

The
components of accumulated other comprehensive income, net of tax, for the periods indicated were as follows (in thousands):



|                                                                      |  |                                  |       |                     |   |                  |  |               |        |  |                     |        |   |                  |   |     |   |  |   |       |  
|--------------------------------------------------------------------- |  | -------------------------------- | ----- | ------------------- | - | ---------------- |  | ------------- | ------ |  | ------------------- | ------ | - | ---------------- | - | --- | - |  | - | ----- | -
|                                                                      |  | For three months ending June 30, |      
|                                                                      |  | 2010                             |       | 2009                |  
|                                                                      |  | Pre-taxamount                    |       | Taxexpense(benefit) |   | Net-of-taxamount |  | Pre-taxamount |        |  | Taxexpense(benefit) |        |   | Net-of-taxamount |  
|Securities available-for-sale:                                        |  |                                  |       |                     |   |                  |  |               |        |  |                     |        |   |                  |   |     |   |  |   |       |  
|Net unrealized gains (losses) arising during the period               |  | $                                | 5,369 |                     | $ | 2,077            |  | $             | 3,292  |  | $                   | (66    | ) |                  | $ | (26 | ) |  | $ | (40   | )
|Retirement plan liabilities                                           |  |                                  | 52    |                     |   | 20               |  |               | 32     |  |                     | 7      |   |                  |   | 3   |   |  |   | 4     |  
|                                                                      |  |                                  |       |                     |   |                  |  |               |        |  |                     |        |   |                  |   |     |   |  |   |       |  
|Other comprehensive income (loss)                                     |  |                                  | 5,421 |                     |   | 2,097            |  |               | 3,324  |  |                     | (59    | ) |                  |   | (23 | ) |  |   | (36   | )
|Net income                                                            |  |                                  |       |                     |   |                  |  |               | 2,992  |  |                     |        |   |                  |   |     |   |  |   | 2,036 |  
|                                                                      |  |                                  |       |                     |   |                  |  |               |        |  |                     |        |   |                  |   |     |   |  |   |       |  
|Comprehensive income                                                  |  |                                  |       |                     |   |                  |  | $             | 6,316  |  |                     |        |   |                  |   |     |   |  | $ | 2,000 |  
|                                                                      |  |                                  |       |                     |   |                  |  |               |        |  |                     |        |   |                  |   |     |   |  |   |       |  
|                                                                      | 
|                                                                      |  | For six months ending June 30,   |      
|                                                                      |  | 2010                             |       | 2009                |  
|                                                                      |  | Pre-taxamount                    |       | Taxexpense(benefit) |   | Net-of-taxamount |  | Pre-taxamount |        |  | Taxexpense(benefit) |        |   | Net-of-taxamount |  
|Securities available-for-sale:                                        |  |                                  |       |                     |   |                  |  |               |        |  |                     |        |   |                  |   |     |   |  |   |       |  
|Net unrealized gains arising during the period                        |  | $                                | 7,132 |                     | $ | 2,733            |  | $             | 4,399  |  | $                   | 1,680  |   |                  | $ | 650 |   |  | $ | 1,030 |  
|Reclassification adjustment for (gains) losses included in net income |  |                                  |      |                     |   |                 |  |               |       |  |                     | (1,015 | ) |                  |   | 393 |   |  |   | (622  | )
|                                                                      |  |                                  |       |                     |   |                  |  |               |        |  |                     |        |   |                  |   |     |   |  |   |       |  
|                                                                      |  |                                  | 7,132 |                     |   | 2,733            |  |               | 4,399  |  |                     | 665    |   |                  |   | 257 |   |  |   | 408   |  
|Retirement plan liabilities                                           |  |                                  | 90    |                     |   | 35               |  |               | 55     |  |                     | 13     |   |                  |   | 5   |   |  |   | 8     |  
|                                                                      |  |                                  |       |                     |   |                  |  |               |        |  |                     |        |   |                  |   |     |   |  |   |       |  
|Other comprehensive loss                                              |  |                                  | 7,222 |                     |   | 2,768            |  |               | 4,454  |  |                     | 678    |   |                  |   | 262 |   |  |   | 416   |  
|Net income                                                            |  |                                  |       |                     |   |                  |  |               | 5,741  |  |                     |        |   |                  |   |     |   |  |   | 4,993 |  
|                                                                      |  |                                  |       |                     |   |                  |  |               |        |  |                     |        |   |                  |   |     |   |  |   |       |  
|Comprehensive income                                                  |  |                                  |       |                     |   |                  |  | $             | 10,195 |  |                     |        |   |                  |   |     |   |  | $ | 5,409 |  
|                                                                      |  |                                  |       |                     |   |                  |  |               |        |  |                     |        |   |                  |   |     |   |  |   |       |  



|7. | Employee and Director Benefit Plans
|-- | -----------------------------------

Defined Benefit Plan and Post-Retirement Benefits

Alliance has a noncontributory defined benefit pension plan (Pension Plan) which it assumed from Bridge Street Financial Inc. (Bridge
Street). The plan covers substantially all former Bridge Street full-time employees who met eligibility requirements on October 6, 2006, at which time all benefits were frozen. Under the plan, retirement benefits are primarily a function
of both the years of service and the level of compensation. The amount contributed to the plan is determined annually on the basis of (a) the maximum amount that can be deducted for federal income tax purposes, or (b) the amount certified
by an actuary as necessary to avoid an accumulated funding deficiency as defined by the Employee Retirement Income Security Act of 1974. Alliance has contributed $119,000 to the Pension Plan in 2010 and expects to contribute an additional $480,000
for the remainder of 2010.

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 (SRPs) for our current Chief Executive Officer and five former employees.



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Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements





Directors Retirement Plan

Alliance has a noncontributory defined benefit retirement plan for non-employee directors (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 directors length and extent of service, payable in a number of circumstances, including normal retirement, death or disability and a
change in control. Upon termination of service, the normal retirement benefit is payable in a lump sum or in ten equal annual installments.

The components of all of the plans net periodic costs for the three months ended June 30, 2010 and 2009 are as follows (in thousands):



|                                                |  |              |     |   |                     |   |     |          |  |                          |      |   |  |      |    |      |  |      |    |      |   |    |  |   |    |  |   |   
|----------------------------------------------- |  | ------------ | --- | - | ------------------- | - | --- | -------- |  | ------------------------ | ---- | - |  | ---- | -- | ---- |  | ---- | -- | ---- | - | -- |  | - | -- |  | - | --
|                                                |  | Pension Plan |     |   | Post-retirementPlan |   |     | SRP Plan |  | DirectorsRetirement Plan
|                                                |  | 2010         |     |   | 2009                |   |     | 2010     |  |                          | 2009 |   |  | 2010 |    | 2009 |  | 2010 |    | 2009
|                                                |  |              |     |   |                     |   |     |         
|Service cost                                    |  | $            |    |   |                     | $ |    |          |  | $                        |     |   |  | $    |   |      |  | $    | 20 |      | $ | 20 |  | $ | 17 |  | $ | 14
|Interest cost                                   |  |              | 71  |   |                     |   | 70  |          |  |                          | 58   |   |  |      | 57 |      |  |      | 48 |      |   | 48 |  |   | 10 |  |   | 8 
|Expected return on assets                       |  |              | (78 | ) |                     |   | (71 | )        |  |                          |     |   |  |      |   |      |  |      |   |      |   |   |  |   |   |  |   |  
|Amortization of unrecognized prior service cost |  |              | 38  |   |                     |   | 41  |          |  |                          | (7   | ) |  |      | (9 | )    |  |      | 7  |      |   | 5  |  |   | 13 |  |   | 12
|                                                |  |              |     |   |                     |   |     |          |  |                          |      |   |  |      |    |      |  |      |    |      |   |    |  |   |    |  |   |   
|Net periodic cost                               |  | $            | 31  |   |                     | $ | 40  |          |  | $                        | 51   |   |  | $    | 48 |      |  | $    | 75 |      | $ | 73 |  | $ | 40 |  | $ | 34
|                                                |  |              |     |   |                     |   |     |          |  |                          |      |   |  |      |    |      |  |      |    |      |   |    |  |   |    |  |   |   

The components of all of the plans net periodic costs (benefit)
for the six months ended June 30, 2010 and 2009 are as follows (in thousands):



|                                                |  |              |      |   |                     |   |      |          |  |                          |      |   |  |      |     |      |  |      |     |      |   |     |  |   |    |  |   |   
|----------------------------------------------- |  | ------------ | ---- | - | ------------------- | - | ---- | -------- |  | ------------------------ | ---- | - |  | ---- | --- | ---- |  | ---- | --- | ---- | - | --- |  | - | -- |  | - | --
|                                                |  | Pension Plan |      |   | Post-retirementPlan |   |      | SRP Plan |  | DirectorsRetirement Plan
|                                                |  | 2010         |      |   | 2009                |   |      | 2010     |  |                          | 2009 |   |  | 2010 |     | 2009 |  | 2010 |     | 2009
|Service cost                                    |  | $            |     |   |                     | $ |     |          |  | $                        |     |   |  | $    |    |      |  | $    | 39  |      | $ | 40  |  | $ | 34 |  | $ | 28
|Interest cost                                   |  |              | 142  |   |                     |   | 140  |          |  |                          | 115  |   |  |      | 115 |      |  |      | 96  |      |   | 96  |  |   | 19 |  |   | 15
|Expected return on assets                       |  |              | (156 | ) |                     |   | (141 | )        |  |                          |     |   |  |      |    |      |  |      |    |      |   |    |  |   |   |  |   |  
|Amortization of unrecognized prior service cost |  |              | 77   |   |                     |   | 82   |          |  |                          | (14  | ) |  |      | (18 | )    |  |      | 13  |      |   | 10  |  |   | 26 |  |   | 23
|                                                |  |              |      |   |                     |   |      |          |  |                          |      |   |  |      |     |      |  |      |     |      |   |     |  |   |    |  |   |   
|Net periodic cost                               |  | $            | 63   |   |                     | $ | 81   |          |  | $                        | 101  |   |  | $    | 97  |      |  | $    | 148 |      | $ | 146 |  | $ | 79 |  | $ | 66
|                                                |  |              |      |   |                     |   |      |          |  |                          |      |   |  |      |     |      |  |      |     |      |   |     |  |   |    |  |   |   



|8. | Fair Value Measurements
|-- | -----------------------

Fair value is
the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date. There are three levels of inputs that may be used to measure fair values:

Level 1  Quoted prices (unadjusted) for identical
assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2  Significant
other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3  Significant unobservable inputs that reflect a companys own assumptions about the assumptions that market participants
would use in pricing an asset or liability.

Assets Measured on a Recurring Basis

The fair values of debt securities available-for-sale are determined by obtaining matrix pricing, which is a mathematical technique used widely in the
industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities relationship to other benchmark quoted securities (Level 2). The fair values of mutual fund and
equity securities available-for-sale are determined by obtaining quoted prices on



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Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements





nationally recognized securities exchanges when available (Level 1). For mutual fund and equity securities where quoted prices are not available, fair values are calculated based on market prices
of similar securities (Level 2).

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



|                                                      |  |            |         |                                                                    |   |                                             |  |   |        
|----------------------------------------------------- |  | ---------- | ------- | ------------------------------------------------------------------ | - | ------------------------------------------- |  | - | -------
|                                                      |  |            |         | Fair Value Measurements at June 30, 2010 
Using                   
|                                                      |  | Fair Value |         | Quoted market pricesin active markets foridentical assets(Level 1) |   | Significant otherobservable inputs(Level 2)
|Debt Securities:                                      |  |            |         |                                                                    |   |                                             |  |   |        
|U.S. Treasury obligations                             |  | $          | 100     |                                                                    | $ |                                            |  | $ | 100    
|Obligations of U.S. government-sponsored corporations |  |            | 5,400   |                                                                    |   |                                            |  |   | 5,400  
|Obligations of states and political subdivisions      |  |            | 71,586  |                                                                    |   |                                            |  |   | 71,586 
|Mortgage-backed securities - residential              |  |            | 326,405 |                                                                    |   |                                            |  |   | 326,405
|                                                      |  |            |         |                                                                    |   |                                             |  |   |        
|Total debt securities                                 |  |            | 403,491 |                                                                    |   |                                            |  |   | 403,491
|Stock Investments:                                    |  |            |         |                                                                    |   |                                             |  |   |        
|Equity securities                                     |  |            | 2,255   |                                                                    |   | 19                                          |  |   | 2,236  
|Mutual Funds                                          |  |            | 1,023   |                                                                    |   | 1,023                                       |  |   |       
|                                                      |  |            |         |                                                                    |   |                                             |  |   |        
|Total stock investments                               |  |            | 3,278   |                                                                    |   | 1,042                                       |  |   | 2,236  
|                                                      |  |            |         |                                                                    |   |                                             |  |   |        
|Total available-for-sale                              |  | $          | 406,769 |                                                                    | $ | 1,042                                       |  | $ | 405,727
|                                                      |  |            |         |                                                                    |   |                                             |  |   |        
|                                                      |  |           
|                                                      |  |            |         | Fair Value Measurements at December 31, 2009 
Using               
|                                                      |  | Fair Value |         | Quoted market pricesin active markets foridentical assets(Level 1) |   | Significant otherobservable inputs(Level 2)
|Debt Securities:                                      |  |            |         |                                                                    |   |                                             |  |   |        
|U.S. Treasury obligations                             |  | $          | 101     |                                                                    | $ |                                            |  | $ | 101    
|Obligations of U.S. government-sponsored Corporations |  |            | 6,129   |                                                                    |   |                                            |  |   | 6,129  
|Obligations of states and political subdivisions      |  |            | 77,147  |                                                                    |   |                                            |  |   | 77,147 
|Mortgage-backed securities - residential              |  |            | 275,680 |                                                                    |   |                                            |  |   | 275,680
|                                                      |  |            |         |                                                                    |   |                                             |  |   |        
|Total debt securities                                 |  |            | 359,057 |                                                                    |   |                                            |  |   | 359,057
|Stock Investments:                                    |  |            |         |                                                                    |   |                                             |  |   |        
|Equity securities                                     |  |            | 2,104   |                                                                    |   | 16                                          |  |   | 2,088  
|Mutual Funds                                          |  |            | 997     |                                                                    |   | 997                                         |  |   |       
|                                                      |  |            |         |                                                                    |   |                                             |  |   |        
|Total stock investments                               |  |            | 3,101   |                                                                    |   | 1,013                                       |  |   | 2,088  
|                                                      |  |            |         |                                                                    |   |                                             |  |   |        
|Total available-for-sale                              |  | $          | 362,158 |                                                                    | $ | 1,013                                       |  | $ | 361,145
|                                                      |  |            |         |                                                                    |   |                                             |  |   |        

Assets Measured on a Non-Recurring Basis

Loans held-for-sale  The fair value of loans held-for-sale is determined, when possible, using quoted secondary-market prices (Level 1). If no such
quoted price exists, the fair value of a loan is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan (Level 2). There was no fair value allowance recorded on loans held-for-sale at
June 30, 2010 and December 31, 2009.

Loans and leases are generally not recorded at fair value on a recurring
basis. Periodically, Alliance records nonrecurring adjustment to the carrying value of loans and leases based on fair value measurements for partial charge-offs of the uncollectible portions of those loans and leases. Nonrecurring
adjustments also include certain impairment amounts for collateral-dependent loans and leases calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting
the loan and, as a result, the carrying value of the loan or lease less the calculated valuation amount does not necessarily represent the fair value of the loan or lease. Real estate collateral is typically valued using independent appraisals or
other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace, adjusted based on non-observable inputs and the related nonrecurring fair value measurement adjustments and
have generally been classified as Level 3. Estimates of fair value used for other collateral supporting commercial loans and leases generally are based on assumptions not observable in the marketplace and, therefore, such valuations have been
classified as Level 3.



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Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements





Impaired loans and leases, which are measured for impairment using the fair value of the collateral for
collateral dependent loans, had a recorded investment of $1.2 million with a valuation allowance of $695,000 for a net fair value of $542,000 at June 30, 2010. At December 31, 2009, impaired loans had a recorded investment of $908,000,
with a valuation allowance of $332,000 for a net fair value of $576,000. Changes in fair value recognized for partial charge-offs of loans and leases and impairment reserves on loans and leases were $1.1 million and $2.0 million for the six months
ended June 30, 2010 and 2009, respectively.

The carrying amounts and estimated fair values of financial instruments, not previously
presented, as of the dates indicated (in thousands):



|                                                          |  |                |           |                     |   |                |  |                     |           |  |   |          
|--------------------------------------------------------- |  | -------------- | --------- | ------------------- | - | -------------- |  | ------------------- | --------- |  | - | ---------
|                                                          |  | June 30, 2010  |           | December 31, 2009  
|                                                          |  | CarryingAmount |           | EstimatedFair Value |   | CarryingAmount |  | EstimatedFair Value
|Financial Assets:                                         |  |                |          
|Cash and cash equivalents                                 |  | $              | 25,135    |                     | $ | 25,135         |  | $                   | 26,696    |  | $ | 26,696   
|FHLB and FRB stock                                        |  |                | 9,813     |                     |   | N/A            |  |                     | 10,074    |  |   | N/A      
|Loans held for sale                                       |  |                | 740       |                     |   | 740            |  |                     | 1,023     |  |   | 1,023    
|Net loans and leases, including impaired loans and leases |  |                | 904,858   |                     |   | 941,233        |  |                     | 904,748   |  |   | 943,818  
|Accrued interest receivable                               |  |                | 4,420     |                     |   | 4,420          |  |                     | 4,167     |  |   | 4,167    
|Financial Liabilities:                                    |  |                |          
|Deposits                                                  |  |                | 1,118,170 |                     |   | 1,122,177      |  |                     | 1,075,671 |  |   | 1,080,083
|Borrowings                                                |  |                | 161,399   |                     |   | 168,963        |  |                     | 172,707   |  |   | 175,914  
|Junior subordinated obligations                           |  |                | 25,774    |                     |   | 9,932          |  |                     | 25,774    |  |   | 9,271    
|Accrued interest payable                                  |  |                | 1,450     |                     |   | 1,450          |  |                     | 1,745     |  |   | 1,745    

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.

We used the following methods and assumptions in estimating our fair value disclosures for financial instruments:

Cash and Cash Equivalents

The carrying
amounts reported in the consolidated balance sheet for cash and short-term instruments approximate those assets fair value.

FHLB and
FRB Stock

It is not practicable to determine the fair value of FHLB and FRB stock due to restrictions placed on its transferability.

Loans and Leases

Variable-rate loans reprice as the associated rate index changes. Therefore, the carrying value of these loans approximates fair value. The fair value of
our fixed-rate loans and leases was calculated by discounting scheduled cash flows through the estimated maturity using current origination rates, credit adjusted for delinquent loans and leases. Our estimate of maturity is based on the contractual
cash flows adjusted for prepayment estimates based on current economic and lending conditions. The fair value of accrued interest approximates carrying value.



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Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements





Deposits

The fair values disclosed for non-interest-bearing accounts and accounts with no stated maturity are, by definition, equal to the amount payable on demand
at the reporting date. The fair value of time deposits was estimated by discounting expected monthly maturities at interest rates approximating those currently being offered at the FHLB on similar terms. The fair value of accrued interest
approximates carrying value.

Borrowings

The fair value of borrowings are estimated using discounted cash flow analysis, based on interest rates approximating those currently being offered for
borrowings with similar terms.

Junior Subordinated Obligations

The fair value of trust preferred debentures has been estimated using a discounted cash flow to maturity method.

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. Such amounts are not significant.



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

This discussion is intended to further your understanding of the consolidated financial condition and results of
operations of Alliance Financial Corporation and its subsidiaries. It should be read in conjunction with the consolidated financial statements included in this report.

Overview

Our consolidated
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 are key financial results for the quarter and six months ended June 30, 2010:



| |  |  | At June 30, 2010, total assets were $1.5 billion and total deposits were $1.1 billion.
| | - |  | --------------------------------------------------------------------------------------



| |  |  | Net income was $3.0 million for the three months ended June 30, 2010 compared to $2.0 million for the same period in 2009. For the six months
ended June 30, 2010, net income was $5.7 million compared to net income of $5.0 million for the first half of 2009.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net income per diluted common share was $0.64 and $0.28 for the three months ending June 30, 2010 and 2009, respectively. Net income per diluted
common share was $1.23 for the six months ending June 30, 2010 compared to $0.85 per share for the same period in 2009.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The tax-equivalent net interest margin was 3.56% in the second quarter of 2010, compared with 3.50% in the second quarter of 2009 and 3.61% in the
first quarter of 2010.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The net interest margin on a tax-equivalent basis for the first half of 2010 was 3.58% compared to 3.46% in the first half of 2009.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Total non-performing assets were $10.3 million or 0.71% of total assets at June 30, 2010 compared with $10.0 million or 0.69% of total assets at
the end of the first quarter of 2010, and $9.0 million or 0.64% of total assets at December 31, 2009.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Non-interest income, excluding securities gains, was 29.7% of total revenue in the first half of 2010 compared with 30.6% in the year ago period.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our efficiency ratio was 69.1% in the six months ended June 30, 2010 compared with 70.4% in the year-ago period.
| | - |  | ----------------------------------------------------------------------------------------------------------------

Critical Accounting Policies, Judgments and Estimates

Our consolidated financial statements are prepared in accordance with US GAAP and practices within the banking industry. Application of these
principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of
the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Actual results could differ from those estimates.

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to
significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. For
additional information on our critical accounting policies, please refer to the information contained in Note 1 of the accompanying consolidated financial statements and Note 1 of the consolidated financial statements included in our 2009 Annual
Report.

Comparison of Operating Results for the Three and Six Months Ended June 30, 2010 and 2009

General

Net income for the quarter ended
June 30, 2010 increased 46.9% to $3.0 million, compared to $2.0 million in the year-ago quarter. The results for the second quarter of 2010 reflect the positive impact of a 5.3% increase in net interest income and a 39.2% decrease in



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the provision for credit losses compared to the year-ago quarter. In addition, net income for the second quarter of 2009 was negatively affected by a special assessment levied by the FDIC on all
FDIC-insured banks. The special assessment for Alliance was $676,000 in the second quarter of 2009.

Net income available to common
shareholders for the quarter ended June 30, 2010 was $3.0 million or $0.64 per diluted common share, compared with $1.3 million or $0.28 per diluted common share for the same period in 2009. Preferred dividends and the accretion of the discount
on preferred stock issued by Alliance under the Treasury Departments Capital Purchase Program (CPP) was $726,000 or $0.16 per diluted common share in the second quarter of 2009. We redeemed the preferred stock in May 2009.

Net income for the six months ended June 30, 2010 increased 15.0% to $5.7 million, compared with $5.0 million in the year-ago period, as
the result of an 8.0% increase in net interest income and a 38.3% decrease in loan loss provisions compared to the first half of 2009.

Net
income available to common shareholders for the six months ended June 30, 2010 was $5.7 million or $1.23 per diluted common share, compared with $3.9 million or $0.85 per diluted common share in the year-ago period. Preferred dividends and the
accretion of the preferred stock discount was $1.1 million or $0.24 per diluted common share for the first half of 2009.

The return on
average assets and return on average shareholders equity were 0.83% and 9.62%, respectively, for the second quarter of 2010, compared to 0.37% and 3.93%, respectively, for the same period in 2009. The return on average assets and return on
average common shareholders equity were 0.80% and 9.28%, respectively, for the six months ended June 30, 2010, compared to 0.56% and 5.59%, respectively, for the same period in 2009.

Net Interest Income

Net interest income
totaled $11.2 million in the second quarter, which was an increase of $568,000 or 5.3% compared with the second quarter of 2009. The increase in net interest income was the result of a higher net interest margin combined with earning asset growth.
Average earning assets increased $29.2 million or 2.3% in the second quarter compared with the year-ago quarter, with a $68.7 million increase in securities offsetting a $26.7 million decline in loan and lease balances. Most of the decline in
average loans and leases was in the lease portfolio as the result of our previously announced decision in 2008 to cease new lease originations. Net interest income was virtually unchanged from the first quarter of 2010 on a slight decline in the net
interest margin, which was offset by a 2.2% increase in earning assets.

The tax-equivalent net interest margin increased six basis points in
the second quarter compared with the year-ago quarter, but was down five basis points compared to the first quarter of 2010. The net interest margin on a tax-equivalent basis was 3.56% in the second quarter of 2010, compared with 3.50% in the second
quarter of 2009 and 3.61% in the first quarter of 2010.

The increase in the net interest margin compared with the year-ago period resulted
primarily from the rate of decline in our cost of funds exceeding the decline in our earning-assets yield. Our yield on earning assets decreased 30 basis points in the second quarter of 2010 compared with the year-ago quarter, due to the effects of
reinvesting cash flows in the low interest rate environment and earning asset growth being concentrated in lower yielding mortgage-backed securities. The cost of funds decreased 42 basis points compared with the second quarter of 2009 due to
continued downward changes in our interest-bearing deposit rates, lower wholesale funding costs and a favorable change in our deposit mix as the result of growth in our lower cost demand, savings and money market accounts (transaction accounts).

The rate of decline in our cost of funds has slowed in recent quarters as our ability to reduce rates further is limited. Our net interest
margin may decline slightly in coming quarters due to the reinvestment of cash flows on our longer term, higher yielding assets at lower rates in the current market.

From September 2007 to December 2008, the Federal Reserve reduced its target fed funds rate from 5.25% to between zero and 0.25%. Over this same time
period, volatility in equity markets, economic recession and federal government monetary and economic stimulus efforts contributed to a sharp 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 339 basis points, 272 basis points and 230 basis points, respectively from August 31, 2007 to December 31, 2008. The target federal funds rate remains between zero and 0.25%, however
treasury yields have rebounded somewhat, with yields increasing 26 basis points, 101 basis points and 158 basis points on the two-year, five-year and ten-year treasury securities, respectively from the end of 2008. The low interest rate environment
of the past three years has resulted in lower yields for all of our earning assets. Yields on our commercial loans and consumer loans were most affected by these conditions, with yields on these assets down 122 basis points and 185 basis points,
respectively, in 2009 compared with 2008. Yields on commercial loans and consumer loans continue to decrease at a slower rate declining 25 basis points and 9 basis points, respectively, in the second quarter of 2010 compared to the second quarter of
2009. These asset types are more sensitive than our other interest-



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bearing assets to changes in market interest rates due to the variable rate characteristics of a portion 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 2.3% in the second quarter to $1.3 billion compared
with the same period last year, due primarily to growth in the securities and residential mortgage portfolios, which offset declines in the average balances of the commercial loans and equipment lease portfolios. Changes in our asset mix also
contributed to the decline in the earning assets yield, as securities and residential mortgages comprised a larger portion of our earning assets in the second quarter of 2010 compared with the year-ago quarter. The yields on these assets are
typically lower than yields on commercial loans and leases. Growth in the securities and residential portfolios combined with low demand for commercial loans and the planned runoff of the equipment lease portfolio resulted in the securities and
residential mortgage portfolios increasing to 57.3% of earning assets in the second quarter, compared with 52.4% in the second quarter of 2009. The average balance of commercial loans in the second quarter increased 4.4% compared with first quarter
of 2010 through higher utilization of existing commercial lines of credit and successful execution of our growth strategy for this business line.

Our cost of funds declined markedly in 2009 and into 2010 in all interest-bearing liability categories. The average yield of money market and time
deposits dropped 100 basis points and 145 basis points, respectively in 2009 as a result of the lower rate environment and our deposit pricing strategies. The average yield of money market and time deposits decreased 30 basis points and 52 basis
points, respectively, in the second quarter of 2010 compared with the year-ago quarter. Our wholesale funding costs also declined in 2009, with the average cost of our borrowings down 41 basis points in 2009 compared to 2008. Our average cost of
borrowings was 11 basis points higher in the second quarter compared with the second quarter of 2009, primarily due to a $52.5 million decrease in average borrowings resulting from the deployment of deposit inflows to pay down short-term borrowings.

The average cost of our junior subordinated obligations decreased 230 basis points in 2009 compared with 2008, and decreased 85 basis points
in the second quarter of 2010 compared with the year-ago quarter due to the decline in the three-month Libor index to which these variable rate obligations are tied.

Our liability mix changed favorably during 2009 and into 2010 as we 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 $765.4 million in the second quarter, which was an increase of $94.6 million or
14.1% from the aggregate average balances of $670.8 million in the second quarter of 2009. Average transaction account balances comprised 67.2% of total average deposits in the second quarter, compared with 63.6% in the second quarter of 2009.
Average time account balances in the first quarter were $373.4 million or 32.8% of total average deposits in the second quarter, compared with $383.2 million or 36.4% in the same period last year. Our ability to gather core transaction deposits over
the past year has been greatly enhanced by our strong financial position and earnings performance, enhanced product offerings including upgraded treasury management and internet banking platforms, and a high positive awareness of the Alliance brand.
These factors, combined with weakness in equity markets and other higher risk asset classes, and negative operating performance or other challenges being experienced by certain larger financial institutions operating in our market, have been
important contributors to our transaction account gains in 2009 and 2010.

Net interest income for the six months ended June 30, 2010
totaled $22.3 million, an increase of $1.6 million or 8.0% compared with $20.7 million in the year-ago period. Average earning assets increased $35.2 million in the first half of 2010 compared with the year-ago period, with most of the growth in
residential mortgages and investment securities. The tax-equivalent net interest margin was 3.58% in the first half of 2010, compared with 3.46% in the first half of 2009. A decrease of 32 basis points in our tax-equivalent earning-assets yield in
the first half of 2010 compared with the same period in 2009 was offset by a decrease of 54 basis points in the cost of funds.

Changes in net
interest margin for the first half of 2010 compared with the same period in 2009 were driven largely by the same factors in the analysis of the second quarter of 2010 to the second quarter in 2009 discussed above.



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Average Balance Sheet and Net Interest Analysis

The following table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the average yields and rates
thereon for the periods indicated. Interest income and yield information is adjusted for items exempt from federal income taxes (nontaxable) and assumes a 34% tax rate. Non-accrual loans have been included in the average balances.
Securities are shown at average amortized cost.



|                                                                                                         |  |                                     |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|-------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | --------- | - | ------------------- | - | ------ | --------- |  | ---- | -------------- |  | - | ------------------- | - |  | --------- | ------ | - |  | ---- | -
|                                                                                                         |  | For the three months ended June 30, |          
|                                                                                                         |  | 2010                                |           |   | 2009                |  
|                                                                                                         |  | AverageBalance                      |           |   | InterestEarned/Paid |   |        | YieldRate |  |      | AverageBalance |  |   | InterestEarned/Paid |   |  | YieldRate |       
|                                                                                                         |  | (Dollars in thousands)              |          
|Assets:                                                                                                  |  |                                     |           |  
|Interest earning assets:                                                                                 |  |                                     |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|Federal funds sold                                                                                       |  | $                                   | 6,022     |   |                     | $ | 1      |           |  | 0.08 | %              |  | $ | 18,903              |   |  | $         | 5      |   |  | 0.13 | %
|Taxable investment securities                                                                            |  |                                     | 323,525   |   |                     |   | 2,935  |           |  | 3.63 | %              |  |   | 239,785             |   |  |           | 2,290  |   |  | 3.82 | %
|Nontaxable investment securities                                                                         |  |                                     | 74,843    |   |                     |   | 1,116  |           |  | 5.97 | %              |  |   | 87,747              |   |  |           | 1,387  |   |  | 6.32 | %
|FHLB and FRB stock                                                                                       |  |                                     | 8,948     |   |                     |   | 74     |           |  | 3.31 | %              |  |   | 11,052              |   |  |           | 162    |   |  | 5.86 | %
|Residential real estate
loans(1)                                                                         |  |                                     | 354,604   |   |                     |   | 4,772  |           |  | 5.38 | %              |  |   | 346,019             |   |  |           | 4,782  |   |  | 5.53 | %
|Commercial loans and commercial real estate                                                              |  |                                     | 207,665   |   |                     |   | 2,707  |           |  | 5.21 | %              |  |   | 206,085             |   |  |           | 2,814  |   |  | 5.46 | %
|Nontaxable commercial loans                                                                              |  |                                     | 7,836     |   |                     |   | 116    |           |  | 5.92 | %              |  |   | 9,573               |   |  |           | 145    |   |  | 6.08 | %
|Taxable leases (net of unearned discount)                                                                |  |                                     | 43,048    |   |                     |   | 639    |           |  | 5.94 | %              |  |   | 68,991              |   |  |           | 1,079  |   |  | 6.26 | %
|Nontaxable leases (net of unearned discount)                                                             |  |                                     | 14,284    |   |                     |   | 231    |           |  | 6.46 | %              |  |   | 20,618              |   |  |           | 277    |   |  | 5.38 | %
|Indirect auto loans                                                                                      |  |                                     | 183,178   |   |                     |   | 2,319  |           |  | 5.06 | %              |  |   | 185,765             |   |  |           | 2,562  |   |  | 5.52 | %
|Consumer loans                                                                                           |  |                                     | 90,517    |   |                     |   | 965    |           |  | 4.26 | %              |  |   | 90,745              |   |  |           | 987    |   |  | 4.35 | %
|                                                                                                         |  |                                     |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|                                                                                                         |  |                                     |           |   |                     |  
|Total interest-earning assets                                                                            |  | $                                   | 1,314,470 |   |                     | $ | 15,875 |           |  | 4.83 | %              |  | $ | 1,285,283           |   |  | $         | 16,490 |   |  | 5.13 | %
|                                                                                                         |  |                                     |           |   |                     |  
|Non-interest earning assets:                                                                             |  |                                     |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|Other assets                                                                                             |  |                                     | 136,264   |   |                     |   |        |           |  |      |                |  |   | 139,138             |   |  |           |        |   |  |      |  
|Less: Allowance for credit losses                                                                        |  |                                     | (10,228   | ) |                     |   |        |           |  |      |                |  |   | (9,866              | ) |  |           |        |   |  |      |  
|Net unrealized gains on securities available-for-sale                                                    |  |                                     | 7,900     |   |                     |   |        |           |  |      |                |  |   | 6,048               |   |  |           |        |   |  |      |  
|                                                                                                         |  |                                     |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|Total assets                                                                                             |  | $                                   | 1,448,406 |   |                     |   |        |           |  |      |                |  | $ | 1,420,603           |   |  |           |        |   |  |      |  
|                                                                                                         |  |                                     |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|                                                                                                         |  |                                     |           |   |                     |  
|Liabilities and shareholders equity:                                                                    |  |                                     |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|Interest bearing liabilities:                                                                            |  |                                     |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|Demand deposits                                                                                          |  |                                     | 135,393   |   |                     |   | 129    |           |  | 0.38 | %              |  | $ | 115,549             |   |  | $         | 134    |   |  | 0.46 | %
|Savings deposits                                                                                         |  |                                     | 100,385   |   |                     |   | 97     |           |  | 0.38 | %              |  |   | 91,859              |   |  |           | 117    |   |  | 0.51 | %
|MMDA deposits                                                                                            |  |                                     | 366,088   |   |                     |   | 729    |           |  | 0.80 | %              |  |   | 308,279             |   |  |           | 844    |   |  | 1.10 | %
|Time deposits                                                                                            |  |                                     | 373,358   |   |                     |   | 1,923  |           |  | 2.06 | %              |  |   | 383,166             |   |  |           | 2,467  |   |  | 2.58 | %
|Borrowings                                                                                               |  |                                     | 143,425   |   |                     |   | 1,151  |           |  | 3.21 | %              |  |   | 190,901             |   |  |           | 1,478  |   |  | 3.10 | %
|Junior subordinated obligations issued to unconsolidated trusts                                          |  |                                     | 25,774    |   |                     |   | 159    |           |  | 2.47 | %              |  |   | 25,774              |   |  |           | 213    |   |  | 3.32 | %
|                                                                                                         |  |                                     |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|Total interest-bearing liabilities                                                                       |  | $                                   | 1,144,423 |   |                     |   | 4,188  |           |  | 1.46 | %              |  | $ | 1,115,528           |   |  | $         | 5,253  |   |  | 1.88 | %
|                                                                                                         |  |                                     |           |   |                     |  
|Non-interest bearing liabilities:                                                                        |  |                                     |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|Demand deposits                                                                                          |  |                                     | 163,554   |   |                     |   |        |           |  |      |                |  |   | 155,156             |   |  |           |        |   |  |      |  
|Other liabilities                                                                                        |  |                                     | 16,049    |   |                     |   |        |           |  |      |                |  |   | 16,672              |   |  |           |        |   |  |      |  
|Shareholders equity                                                                                     |  |                                     | 124,380   |   |                     |   |        |           |  |      |                |  |   | 133,247             |   |  |           |        |   |  |      |  
|                                                                                                         |  |                                     |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|Total liabilities and shareholders equity                                                               |  | $                                   | 1,448,406 |   |                     |   |        |           |  |      |                |  | $ | 1,420,603           |   |  |           |        |   |  |      |  
|                                                                                                         |  |                                     |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|                                                                                                         |  |                                     |           |   |                     |  
|Net interest income (tax-equivalent)                                                                     |  |                                     |           |   |                     | $ | 11,687 |           |  |      |                |  |   |                     |   |  | $         | 11,237 |   |  |      |  
|                                                                                                         |  |                                     |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|Net interest rate spread                                                                                 |  |                                     |           |   |                     |   |        |           |  | 3.37 | %              |  |   |                     |   |  |           |        |   |  | 3.25 | %
|Net interest margin (tax-equivalent)                                                                     |  |                                     |           |   |                     |   |        |           |  | 3.56 | %              |  |   |                     |   |  |           |        |   |  | 3.50 | %
|Federal tax exemption on non-taxable investment securities, loans and leases included in interest income |  |                                     |           |   |                     |   | (497   | )         |  |      |                |  |   |                     |   |  |           | (615   | ) |  |      |  
|                                                                                                         |  |                                     |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|Net interest income                                                                                      |  |                                     |           |   |                     | $ | 11,190 |           |  |      |                |  |   |                     |   |  | $         | 10,622 |   |  |      |  
|                                                                                                         |  |                                     |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  



|(1) | Includes loans held-for-sale
|--- | ----------------------------



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##### Table of Contents

|                                                                                                         |  |                                   |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|-------------------------------------------------------------------------------------------------------- |  | --------------------------------- | --------- | - | ------------------- | - | ------ | --------- |  | ---- | -------------- |  | - | ------------------- | - |  | --------- | ------ | - |  | ---- | -
|                                                                                                         |  | For the six months ended June 30, |          
|                                                                                                         |  | 2010                              |           |   | 2009                |  
|                                                                                                         |  | AverageBalance                    |           |   | InterestEarned/Paid |   |        | YieldRate |  |      | AverageBalance |  |   | InterestEarned/Paid |   |  | YieldRate |       
|                                                                                                         |  | (Dollars in thousands)            |          
|Assets:                                                                                                  |  |                                   |           |  
|Interest earning assets:                                                                                 |  |                                   |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|Federal funds sold                                                                                       |  | $                                 | 6,769     |   |                     | $ | 3      |           |  | 0.09 | %              |  | $ | 25,907              |   |  | $         | 14     |   |  | 0.11 | %
|Taxable investment securities                                                                            |  |                                   | 308,277   |   |                     |   | 5,651  |           |  | 3.67 | %              |  |   | 222,219             |   |  |           | 4,550  |   |  | 4.10 | %
|Nontaxable investment securities                                                                         |  |                                   | 75,022    |   |                     |   | 2,214  |           |  | 5.90 | %              |  |   | 88,335              |   |  |           | 2,724  |   |  | 6.17 | %
|FHLB and FRB stock                                                                                       |  |                                   | 9,126     |   |                     |   | 266    |           |  | 5.84 | %              |  |   | 10,994              |   |  |           | 213    |   |  | 3.87 | %
|Residential real estate
loans(1)                                                                         |  |                                   | 355,603   |   |                     |   | 9,552  |           |  | 5.37 | %              |  |   | 335,465             |   |  |           | 9,395  |   |  | 5.60 | %
|Commercial loans and commercial real estate                                                              |  |                                   | 203,349   |   |                     |   | 5,402  |           |  | 5.31 | %              |  |   | 204,642             |   |  |           | 5,749  |   |  | 5.62 | %
|Nontaxable commercial loans                                                                              |  |                                   | 8,287     |   |                     |   | 242    |           |  | 5.83 | %              |  |   | 9,679               |   |  |           | 292    |   |  | 6.04 | %
|Taxable leases (net of unearned discount)                                                                |  |                                   | 46,123    |   |                     |   | 1,371  |           |  | 5.95 | %              |  |   | 73,225              |   |  |           | 2,325  |   |  | 6.35 | %
|Nontaxable leases (net of unearned discount)                                                             |  |                                   | 14,522    |   |                     |   | 470    |           |  | 6.47 | %              |  |   | 21,064              |   |  |           | 568    |   |  | 5.39 | %
|Indirect auto loans                                                                                      |  |                                   | 182,487   |   |                     |   | 4,710  |           |  | 5.16 | %              |  |   | 183,436             |   |  |           | 5,070  |   |  | 5.53 | %
|Consumer loans                                                                                           |  |                                   | 90,964    |   |                     |   | 1,948  |           |  | 4.28 | %              |  |   | 90,344              |   |  |           | 2,082  |   |  | 4.61 | %
|                                                                                                         |  |                                   |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|                                                                                                         |  |                                   |           |   |                     |  
|Total interest-earning assets                                                                            |  | $                                 | 1,300,529 |   |                     | $ | 31,829 |           |  | 4.89 | %              |  | $ | 1,265,310           |   |  | $         | 32,982 |   |  | 5.21 | %
|                                                                                                         |  |                                   |           |   |                     |  
|Non-interest earning assets:                                                                             |  |                                   |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|Other assets                                                                                             |  |                                   | 138,231   |   |                     |   |        |           |  |      |                |  |   | 137,157             |   |  |           |        |   |  |      |  
|Less: Allowance for credit losses                                                                        |  |                                   | (10,059   | ) |                     |   |        |           |  |      |                |  |   | (9,678              | ) |  |           |        |   |  |      |  
|Net unrealized gains on securities available-for-sale                                                    |  |                                   | 7,299     |   |                     |   |        |           |  |      |                |  |   | 6,051               |   |  |           |        |   |  |      |  
|                                                                                                         |  |                                   |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|Total assets                                                                                             |  | $                                 | 1,436,000 |   |                     |   |        |           |  |      |                |  | $ | 1,398,840           |   |  |           |        |   |  |      |  
|                                                                                                         |  |                                   |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|                                                                                                         |  |                                   |           |   |                     |  
|Liabilities and shareholders equity:                                                                    |  |                                   |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|Interest bearing liabilities:                                                                            |  |                                   |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|Demand deposits                                                                                          |  | $                                 | 133,720   |   |                     | $ | 272    |           |  | 0.41 | %              |  | $ | 115,808             |   |  | $         | 284    |   |  | 0.49 | %
|Savings deposits                                                                                         |  |                                   | 97,584    |   |                     |   | 203    |           |  | 0.42 | %              |  |   | 89,954              |   |  |           | 234    |   |  | 0.52 | %
|MMDA deposits                                                                                            |  |                                   | 357,639   |   |                     |   | 1,502  |           |  | 0.84 | %              |  |   | 287,298             |   |  |           | 1,807  |   |  | 1.26 | %
|Time deposits                                                                                            |  |                                   | 371,958   |   |                     |   | 3,894  |           |  | 2.09 | %              |  |   | 369,961             |   |  |           | 5,176  |   |  | 2.80 | %
|Borrowings                                                                                               |  |                                   | 148,552   |   |                     |   | 2,339  |           |  | 3.15 | %              |  |   | 201,073             |   |  |           | 3,128  |   |  | 3.11 | %
|Junior subordinated obligations issued to unconsolidated trusts                                          |  |                                   | 25,774    |   |                     |   | 313    |           |  | 2.43 | %              |  |   | 25,774              |   |  |           | 468    |   |  | 3.63 | %
|                                                                                                         |  |                                   |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|Total interest-bearing liabilities                                                                       |  | $                                 | 1,135,227 |   |                     | $ | 8,523  |           |  | 1.50 | %              |  | $ | 1,089,868           |   |  | $         | 11,097 |   |  | 2.04 | %
|                                                                                                         |  |                                   |           |   |                     |  
|Non-interest bearing liabilities:                                                                        |  |                                   |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|Demand deposits                                                                                          |  |                                   | 160,360   |   |                     |   |        |           |  |      |                |  |   | 151,991             |   |  |           |        |   |  |      |  
|Other liabilities                                                                                        |  |                                   | 16,643    |   |                     |   |        |           |  |      |                |  |   | 17,149              |   |  |           |        |   |  |      |  
|Shareholders equity                                                                                     |  |                                   | 123,770   |   |                     |   |        |           |  |      |                |  |   | 139,832             |   |  |           |        |   |  |      |  
|                                                                                                         |  |                                   |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|Total liabilities and shareholders equity                                                               |  | $                                 | 1,436,000 |   |                     |   |        |           |  |      |                |  | $ | 1,398,840           |   |  |           |        |   |  |      |  
|                                                                                                         |  |                                   |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|                                                                                                         |  |                                   |           |   |                     |  
|Net interest income (tax-equivalent)                                                                     |  |                                   |           |   |                     | $ | 23,306 |           |  |      |                |  |   |                     |   |  | $         | 21,885 |   |  |      |  
|                                                                                                         |  |                                   |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|                                                                                                         |  |                                   |           |   |                     |  
|Net interest rate spread                                                                                 |  |                                   |           |   |                     |   |        |           |  | 3.39 | %              |  |   |                     |   |  |           |        |   |  | 3.27 | %
|Net interest margin (tax-equivalent)                                                                     |  |                                   |           |   |                     |   |        |           |  | 3.58 | %              |  |   |                     |   |  |           |        |   |  | 3.46 | %
|Federal tax exemption on non-taxable investment securities, loans and leases included in interest income |  |                                   |           |   |                     |   | (995   | )         |  |      |                |  |   |                     |   |  |           | (1,218 | ) |  |      |  
|                                                                                                         |  |                                   |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  
|Net interest income                                                                                      |  |                                   |           |   |                     | $ | 22,311 |           |  |      |                |  |   |                     |   |  | $         | 20,667 |   |  |      |  
|                                                                                                         |  |                                   |           |   |                     |   |        |           |  |      |                |  |   |                     |   |  |           |        |   |  |      |  



|(1) | Includes loans held-for-sale
|--- | ----------------------------



- 21 -



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##### Table of Contents

The following table sets forth the dollar volume of increase (decrease) in interest income and interest
expense resulting from changes in the volume of earning assets and interest-bearing liabilities, and from changes in rates for the periods indicated. Volume changes are computed by multiplying the volume difference by the prior periods rate.
Rate changes are computed by multiplying the rate difference by the prior periods balance. The change in interest income and expense due to both rate and volume has been allocated proportionally between the volume and rate variances (in
thousands).



|                                                                           |  |                                                                                           |       |   |                                                                                         |   |        |           |  |   |        |   |  |      |       |   |           |   |        |   |  |   |        |  
|-------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- | ----- | - | --------------------------------------------------------------------------------------- | - | ------ | --------- |  | - | ------ | - |  | ---- | ----- | - | --------- | - | ------ | - |  | - | ------ | -
|                                                                           |  | For the three months
endedJune 30, 2010Compared
toJune 30, 2009Increase/(Decrease) Due To |       |   | For the six months endedJune 30,
2010Compared toJune 30,
2009Increase/(Decrease) Due To |  
|                                                                           |  | Volume                                                                                    |       |   | Rate                                                                                    |   |        | NetChange |  |   | Volume |   |  | Rate |       |   | NetChange |  
|Federal funds sold                                                         |  | $                                                                                         | (3    | ) |                                                                                         | $ | (1     | )         |  | $ | (4     | ) |  | $    | (9    | ) |           | $ | (2     | ) |  | $ | (11    | )
|Taxable investment securities                                              |  |                                                                                           | 1,357 |   |                                                                                         |   | (712   | )         |  |   | 645    |   |  |      | 2,358 |   |           |   | (1,257 | ) |  |   | 1,101  |  
|Non-taxable investment securities                                          |  |                                                                                           | (197  | ) |                                                                                         |   | (74    | )         |  |   | (271   | ) |  |      | (396  | ) |           |   | (114   | ) |  |   | (510   | )
|FHLB and FRB stock                                                         |  |                                                                                           | (27   | ) |                                                                                         |   | (61    | )         |  |   | (88    | ) |  |      | (95   | ) |           |   | 148    |   |  |   | 53     |  
|Real estate loans                                                          |  |                                                                                           | 488   |   |                                                                                         |   | (498   | )         |  |   | (10    | ) |  |      | 1,012 |   |           |   | (855   | ) |  |   | 157    |  
|Commercial loans and commercial real estate                                |  |                                                                                           | 133   |   |                                                                                         |   | (240   | )         |  |   | (107   | ) |  |      | (36   | ) |           |   | (311   | ) |  |   | (347   | )
|Non-taxable commercial loans                                               |  |                                                                                           | (25   | ) |                                                                                         |   | (4     | )         |  |   | (29    | ) |  |      | (40   | ) |           |   | (10    | ) |  |   | (50    | )
|Taxable leases (net of unearned income)                                    |  |                                                                                           | (388  | ) |                                                                                         |   | (52    | )         |  |   | (440   | ) |  |      | (815  | ) |           |   | (139   | ) |  |   | (954   | )
|Non-taxable leases (net of unearned income)                                |  |                                                                                           | (297  | ) |                                                                                         |   | 251    |           |  |   | (46    | ) |  |      | (336  | ) |           |   | 238    |   |  |   | (98    | )
|Indirect loans                                                             |  |                                                                                           | (35   | ) |                                                                                         |   | (208   | )         |  |   | (243   | ) |  |      | (26   | ) |           |   | (334   | ) |  |   | (360   | )
|Consumer loans                                                             |  |                                                                                           | (2    | ) |                                                                                         |   | (20    | )         |  |   | (22    | ) |  |      | 40    |   |           |   | (174   | ) |  |   | (134   | )
|                                                                           |  |                                                                                           |       |   |                                                                                         |   |        |           |  |   |        |   |  |      |       |   |           |   |        |   |  |   |        |  
|Total interest-earning assets                                              |  |                                                                                           | 1,004 |   |                                                                                         |   | (1,619 | )         |  |   | (615   | ) |  |      | 1,657 |   |           |   | (2,810 | ) |  |   | (1,153 | )
|                                                                           |  |                                                                                           |       |   |                                                                                         |   |        |           |  |   |        |   |  |      |       |   |           |   |        |   |  |   |        |  
|                                                                           |  |                                                                                           |       |   |                                                                                         |  
|Interest-bearing demand deposits                                           |  |                                                                                           | 92    |   |                                                                                         |   | (97    | )         |  |   | (5     | ) |  |      | 85    |   |           |   | (97    | ) |  |   | (12    | )
|Savings deposits                                                           |  |                                                                                           | 58    |   |                                                                                         |   | (78    | )         |  |   | (20    | ) |  |      | 46    |   |           |   | (77    | ) |  |   | (31    | )
|MMDA deposits                                                              |  |                                                                                           | 699   |   |                                                                                         |   | (814   | )         |  |   | (115   | ) |  |      | 889   |   |           |   | (1,194 | ) |  |   | (305   | )
|Time deposits                                                              |  |                                                                                           | (62   | ) |                                                                                         |   | (482   | )         |  |   | (544   | ) |  |      | 83    |   |           |   | (1,365 | ) |  |   | (1,282 | )
|Borrowings                                                                 |  |                                                                                           | (662  | ) |                                                                                         |   | 335    |           |  |   | (327   | ) |  |      | (902  | ) |           |   | 113    |   |  |   | (789   | )
|Junior subordinated obligations issued to unconsolidated subsidiary trusts |  |                                                                                           |      |   |                                                                                         |   | (54    | )         |  |   | (54    | ) |  |      |      |   |           |   | (155   | ) |  |   | (155   | )
|                                                                           |  |                                                                                           |       |   |                                                                                         |   |        |           |  |   |        |   |  |      |       |   |           |   |        |   |  |   |        |  
|Total interest-bearing liabilities                                         |  |                                                                                           | 125   |   |                                                                                         |   | (1,190 | )         |  |   | (1,065 | ) |  |      | 201   |   |           |   | (2,775 | ) |  |   | (2,574 | )
|                                                                           |  |                                                                                           |       |   |                                                                                         |   |        |           |  |   |        |   |  |      |       |   |           |   |        |   |  |   |        |  
|                                                                           |  |                                                                                           |       |   |                                                                                         |  
|Net interest income (tax-equivalent)                                       |  | $                                                                                         | 879   |   |                                                                                         | $ | (429   | )         |  | $ | 450    |   |  | $    | 1,456 |   |           | $ | (35    | ) |  | $ | 1,421  |  
|                                                                           |  |                                                                                           |       |   |                                                                                         |   |        |           |  |   |        |   |  |      |       |   |           |   |        |   |  |   |        |  

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, 2010          |        |      | March 31, 2010 |   |   | December 31, 2009 |       
|                                    |  | $                      |        | %(1) |                |   | $ |                   | %(1)   |  |      | $ |  | %(1) |       
|                                    |  | (Dollars in thousands) |       
|30 days past due                    |  | $                      | 5,864  |      | 0.64           | % |   | $                 | 6,493  |  | 0.72 | % |  | $    | 7,883  |  | 0.87 | %
|60 days past due                    |  |                        | 1,263  |      | 0.14           | % |   |                   | 867    |  | 0.10 | % |  |      | 2,271  |  | 0.25 | %
|90 days past due and still accruing |  |                        |       |      |               |   |   |                   | 57     |  |     |   |  |      |       |  |     |  
|Non-accrual                         |  |                        | 9,679  |      | 1.06           | % |   |                   | 9,532  |  | 1.06 | % |  |      | 8,582  |  | 0.94 | %
|                                    |  |                        |        |      |                |   |   |                   |        |  |      |   |  |      |        |  |      |  
|Total                               |  | $                      | 16,806 |      | 1.84           | % |   | $                 | 16,949 |  | 1.88 | % |  | $    | 18,736 |  | 2.06 | %
|                                    |  |                        |        |      |                |   |   |                   |        |  |      |   |  |      |        |  |      |  



|(1) | As a percentage of total loans and leases, excluding deferred costs
|--- | -------------------------------------------------------------------

Overall delinquencies were slightly lower for the third consecutive quarter with fewer loans and leases 30 to 89 days past due. Loans and leases past due
30 days or more (including non-performing) were $16.8 million or 1.84% of total loans and leases, which was $143,000 less than March 31, 2010 and $1.9 million lower than the end of 2009. The decrease in past due loans and leases occurred as a
result of payments of past due amounts, charge-offs and repossession and sale of collateral.



- 22 -



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##### Table of Contents

The following table represents information concerning the aggregate amount of non-performing assets (in
thousands):



|                                                     |  |               |        |                |   |                   |  |   |      
|---------------------------------------------------- |  | ------------- | ------ | -------------- | - | ----------------- |  | - | -----
|                                                     |  | June 30, 2010 |        | March 31, 2010 |   | December 31, 2009
|Non-accruing loans and leases:                       |  |               |        |                |   |                   |  |   |      
|Residential real estate                              |  | $             | 3,444  |                | $ | 3,513             |  | $ | 2,843
|Commercial loans                                     |  |               | 1,769  |                |   | 1,888             |  |   | 2,167
|Commercial real estate                               |  |               | 2,218  |                |   | 2,200             |  |   | 1,846
|Leases                                               |  |               | 1,496  |                |   | 1,208             |  |   | 1,418
|Indirect auto                                        |  |               | 193    |                |   | 187               |  |   | 109  
|Other consumer loans                                 |  |               | 559    |                |   | 536               |  |   | 199  
|                                                     |  |               |        |                |   |                   |  |   |      
|Total non-accruing loans and leases                  |  |               | 9,679  |                |   | 9,532             |  |   | 8,582
|Accruing loans and leases delinquent 90 days or more |  |               |       |                |   | 57                |  |   |     
|                                                     |  |               |        |                |   |                   |  |   |      
|Total non-performing loans and leases                |  |               | 9,679  |                |   | 9,589             |  |   | 8,582
|Other real estate and repossessed assets             |  |               | 603    |                |   | 422               |  |   | 445  
|                                                     |  |               |        |                |   |                   |  |   |      
|Total non-performing assets                          |  | $             | 10,282 |                | $ | 10,011            |  | $ | 9,027
|                                                     |  |               |        |                |   |                   |  |   |      

Persistent weakness in the local, state and national economies
continued to affect the levels of nonperforming assets in the second quarter, which were $10.3 million or 0.71% of total assets at June 30, 2010, compared with $10.0 million or 0.69% of total assets at March 31, 2010, and $9.0 million or
0.64% of total assets at December 31, 2009. Nonperforming assets were comprised primarily of nonperforming loans and leases of $9.7 million at June 30, 2010, which was an increase of $1.1 million from the end of 2009, but was virtually
unchanged from March 31, 2010. Conventional residential mortgages comprised $3.4 million (40 loans) or 35.6% of total nonperforming loans and leases at June 30, 2010, while nonperforming commercial loans totaled $4.0 million (37 loans) or
41.2% and leases on nonperforming status totaled $1.5 million (26 leases) or 15.5%. Much of the increase in nonperforming loans and leases occurred in the residential mortgage portfolio due in part to the extended period of time required to complete
a workout arrangement or foreclose on the real estate collateral.

As a recurring part of our portfolio management program, we have identified
approximately $11.6 million in potential problem loans at June 30, 2010 as compared to $9.1 million at December 31, 2009. The average balance of potential problem loans was $322,000 at June 30, 2010 compared with $252,000 at
December 31, 2009. Potential problem loans are loans that are currently performing, but where the borrowers operating performance or other relevant factors could result in potential credit problems, and are typically classified by our
loan rating system as substandard. At June 30, 2010, potential problem loans primarily consisted of commercial real estate, commercial loans and leases. There can be no assurance that additional loans will not become nonperforming,
require restructuring, or require increased provision for loan losses.

The Bank has a loan and lease monitoring program that it believes
appropriately evaluates non-performing loans and leases and the loan and lease portfolio in general. The review program continually audits the loan and lease portfolio to confirm managements loan and lease risk rating system, and tracks
problem loans and leases to ensure compliance with loan and lease policy underwriting guidelines, and to evaluate the adequacy of the allowance for credit losses.

The Banks policy is to place a loan or lease on non-accrual status and recognize income on a cash basis when a loan or lease is more than 90 days
past due, unless in the opinion of management, the loan or lease is well secured and in the process of collection. The Bank considers a loan or lease impaired when, based on current information and events, it is probable that the Bank will be unable
to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan or lease agreement. The measurement of impaired loans and leases is generally based upon the present value of future cash flows
discounted at the historical effective interest rate, except that all collateral-dependent loans and leases are measured for impairment based on fair value of the collateral. As of June 30, 2010, there was $3.7 million in impaired loans for
which $695,000 in related allowance for credit losses was specifically allocated. As of December 31, 2009, there was $3.6 million in impaired loans for which $332,000 in related allowance for credit losses was specifically allocated.

The allowance for credit losses represents managements best estimate of probable incurred credit losses in the Banks loan and
lease portfolio. Managements quarterly evaluation of the allowance for credit losses is a comprehensive analysis that builds a total allowance by evaluating the probable incurred credit losses within each product class. The Bank uses a general
allocation methodology for all residential and consumer loan pools. This methodology estimates an allowance for each pool based on the average loss rate for the time period that includes the current year and two full prior years. The average loss
rate is adjusted to reflect the expected impact that current trends regarding loan growth, delinquency, losses, economic conditions, loan concentrations, policy changes, experience and ability of lending personnel, and current interest rates have.
For commercial loan and lease pools, the Bank establishes a specific allocation for all loans and leases in excess of $200,000 which are considered to be impaired and which have been risk rated under the Banks risk rating system as
substandard, doubtful or loss. The specific allocation is based on the most recent valuation of the loan or lease collateral. For all other commercial loans and leases, the Bank uses the general allocation methodology that estimates the probable
incurred loss for each risk rating category. The general allocation methodology for



- 23 -



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##### Table of Contents

commercial loans and leases considers the same qualitative factors that are considered when evaluating residential mortgage and consumer loan pools. The combination of using both the general and
specific allocation methodologies reflects managements best estimate of the probable incurred credit losses in the Banks loan and lease portfolio. Loans and leases are charged against the allowance for credit losses, in accordance with
the Banks loan and lease policy, when they are determined by management to be uncollectible. Recoveries on loans and leases previously charged off are credited to the allowance for credit losses when they are received. When management
determines that the allowance for credit losses is less than adequate to provide for probable incurred losses, a direct charge to operating income is recorded.

The following table summarizes changes in the allowance for credit losses arising from loans and leases charged off, recoveries on loans and leases
previously charged off and additions to the allowance, which have been charged to expense (in thousands):



|                                                       |  |                             |        |                           |   |       |  |      |        |  |   |      
|------------------------------------------------------ |  | --------------------------- | ------ | ------------------------- | - | ----- |  | ---- | ------ |  | - | -----
|                                                       |  | Three months ended June 30, |        | Six months ended June 30,
|                                                       |  | 2010                        |        | 2009                      |   | 2010  |  | 2009
|                                                       |  |                             |        |                          
|Balance at beginning of year                           |  | $                           | 9,717  |                           | $ | 9,707 |  | $    | 9,414  |  | $ | 9,161
|Loans and leases charged-off:                          |  |                             |        |                           |   |       |  |      |        |  |   |      
|Residential real estate                                |  |                             | 90     |                           |   | 17    |  |      | 90     |  |   | 69   
|Commercial loans                                       |  |                             | 83     |                           |   | 60    |  |      | 256    |  |   | 86   
|Commercial real estate                                 |  |                             | 164    |                           |   |      |  |      | 164    |  |   |     
|Leases                                                 |  |                             | 135    |                           |   | 1,960 |  |      | 613    |  |   | 2,773
|Indirect auto                                          |  |                             | 56     |                           |   | 60    |  |      | 129    |  |   | 170  
|Consumer                                               |  |                             | 196    |                           |   | 218   |  |      | 463    |  |   | 600  
|                                                       |  |                             |        |                           |   |       |  |      |        |  |   |      
|Total loans and leases charged off                     |  |                             | 724    |                           |   | 2,315 |  |      | 1,715  |  |   | 3,698
|Recoveries of loans and leases previously charged off: |  |                             |        |                           |   |       |  |      |        |  |   |      
|Residential real estate                                |  |                             | 30     |                           |   | 1     |  |      | 31     |  |   | 1    
|Commercial loans                                       |  |                             | 8      |                           |   | 479   |  |      | 24     |  |   | 483  
|Commercial real estate                                 |  |                             |       |                           |   |      |  |      |       |  |   |     
|Leases                                                 |  |                             | 8      |                           |   | 7     |  |      | 19     |  |   | 12   
|Indirect auto                                          |  |                             | 39     |                           |   | 27    |  |      | 73     |  |   | 52   
|Consumer                                               |  |                             | 120    |                           |   | 153   |  |      | 257    |  |   | 298  
|                                                       |  |                             |        |                           |   |       |  |      |        |  |   |      
|Total recoveries                                       |  |                             | 205    |                           |   | 667   |  |      | 404    |  |   | 846  
|                                                       |  |                             |        |                           |   |       |  |      |        |  |   |      
|Net loans and leases charged off                       |  |                             | 519    |                           |   | 1,648 |  |      | 1,311  |  |   | 2,852
|Provision for credit losses                            |  |                             | 1,095  |                           |   | 1,800 |  |      | 2,190  |  |   | 3,550
|                                                       |  |                             |        |                           |   |       |  |      |        |  |   |      
|Balance at end of year                                 |  | $                           | 10,293 |                           | $ | 9,859 |  | $    | 10,293 |  | $ | 9,859
|                                                       |  |                             |        |                           |   |       |  |      |        |  |   |      

The provision for credit losses decreased 39.2% and 38.3% in the
quarter and six months ended June 30, 2010 compared with the year-ago periods largely as the result of substantially lower net charge-offs in 2010 and generally improved asset quality. The decrease in charge-offs in 2010 compared to the prior
year is largely attributable to elevated charge-offs in four segments of our equipment lease portfolio throughout much of 2009. Charge-offs in these four segments of the lease portfolio totaled $2.0 million in the first six months of 2009,
representing 70.9% of our total net loan and lease charge-offs for that period. The remaining balance of these four segments at June 30, 2010 was $3.4 million, and the allowance for credit losses allocated to these segments totaled $878,000 or
25.5% of the remaining balances. The provision for credit losses was $1.1 million and $2.2 million in the quarter and six months ended June 30, 2010, respectively, compared with $1.8 million and $3.6 million in the year-ago periods,
respectively.

Net charge-offs were $519,000 and $1.3 million in the three months and six months ended June 30, 2010, respectively,
compared with $1.6 million and $2.9 million in the year-ago periods, respectively. Net charge-offs equaled 0.23% and 0.29%, respectively, of average loans and leases during the three months and six months ended June 30, 2010, compared with
0.71% and 0.62%, respectively, in the year-ago periods. The provision for credit losses as a percentage of net charge-offs was 211.0% and 167.0%, respectively, in the quarter and six months ended June 30, 2010, compared with 109.2% and 124.5%,
respectively, in the year-ago periods.

The allowance for credit losses was $10.3 million at June 30, 2010, compared with $9.7 million at
March 31, 2010 and $9.4 million at December 31, 2009. The ratio of the allowance for credit losses to total loans and leases was 1.12% at June 30, 2010, compared with 1.07% at March 31, 2010 and 1.03% at December 31, 2009.
The ratio of the allowance for credit losses to nonperforming loans and leases was 106.3% at June 30, 2010, compared with 101.3% at March 31, 2010 and 109.7% at December 31, 2009.



- 24 -



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##### Table of Contents

The following table presents certain asset quality ratios for the periods indicated:



|                                                                         |  |                                |   |  |                              |   |  |       |   |  |       |  
|------------------------------------------------------------------------ |  | ------------------------------ | - |  | ---------------------------- | - |  | ----- | - |  | ----- | -
|                                                                         |  | For three monthsended June 30, |   |  | For six monthsended June 30, |  
|                                                                         |  | 2010                           |   |  | 2009                         |   |  | 2010  |   |  | 2009  |  
|                                                                         |  |                                |   | 
|Net loans and leases charged-off to average loans and leases, annualized |  | 0.23                           | % |  | 0.71                         | % |  | 0.29  | % |  | 0.62  | %
|Provision for credit losses to average loans and leases, annualized      |  | 0.49                           | % |  | 0.77                         | % |  | 0.49  | % |  | 0.77  | %
|Allowance for credit losses to period-end loans and leases               |  | 1.12                           | % |  | 1.05                         | % |  | 1.12  | % |  | 1.05  | %
|Allowance for credit losses to non-performing loans and leases           |  | 106.3                          | % |  | 129.5                        | % |  | 106.3 | % |  | 129.5 | %
|Non-performing loans and leases to period-end loans and leases           |  | 1.06                           | % |  | 0.81                         | % |  | 1.06  | % |  | 0.81  | %
|Non-performing assets to period-end assets                               |  | 0.71                           | % |  | 0.55                         | % |  | 0.71  | % |  | 0.55  | %

Non-interest Income

The following table sets forth certain information on non-interest income for the periods indicated, dollars in thousands:



|                                    |  |                             |       |      |                           |        |  |   |      |   |  |       |        |      |   |       |  |   |        |  |   |        |   |  |       |   
|----------------------------------- |  | --------------------------- | ----- | ---- | ------------------------- | ------ |  | - | ---- | - |  | ----- | ------ | ---- | - | ----- |  | - | ------ |  | - | ------ | - |  | ----- | --
|                                    |  | Three months ended June 30, |       |      | Six months ended June 30, |       
|                                    |  |                             |       |      |                           | Change |  |   |      |   |  |       | Change |     
|                                    |  | 2010                        |       | 2009 |                           | $      |  |   | %    |   |  | 2010  |        | 2009 |   | $     |  |   | %      | 
|Investment management income        |  | $                           | 1,828 |      | $                         | 1,785  |  | $ | 43   |   |  | 2.4   | %      |      | $ | 3,635 |  | $ | 3,546  |  | $ | 89     |   |  | 2.5   | % 
|Service charges on deposit accounts |  |                             | 1,146 |      |                           | 1,268  |  |   | (122 | ) |  | (9.6  | )%     |      |   | 2,196 |  |   | 2,461  |  |   | (265   | ) |  | (10.8 | )%
|Card-related fees                   |  |                             | 652   |      |                           | 567    |  |   | 85   |   |  | 15.0  | %      |      |   | 1,243 |  |   | 1,088  |  |   | 155    |   |  | 14.2  | % 
|Insurance agency                    |  |                             | 420   |      |                           | 374    |  |   | 46   |   |  | 12.3  | %      |      |   | 766   |  |   | 689    |  |   | 77     |   |  | 11.2  | % 
|Bank-owned life insurance           |  |                             | 266   |      |                           | 252    |  |   | 14   |   |  | 5.6   | %      |      |   | 535   |  |   | 499    |  |   | 36     |   |  | 7.2   | % 
|Gain on the sale of loans           |  |                             | 221   |      |                           | 250    |  |   | (29  | ) |  | (11.6 | )%     |      |   | 414   |  |   | 275    |  |   | 139    |   |  | 50.5  | % 
|Gain on sale of securities          |  |                             |      |      |                           |       |  |   |     |   |  |      |        |      |   |      |  |   | 1,015  |  |   | (1,015 | ) |  | (100  | )%
|Other non-interest income           |  |                             | 326   |      |                           | 270    |  |   | 56   |   |  | 20.7  | %      |      |   | 631   |  |   | 553    |  |   | 78     |   |  | 14.1  | % 
|                                    |  |                             |       |      |                           |        |  |   |      |   |  |       |        |      |   |       |  |   |        |  |   |        |   |  |       |   
|Total non-interest income           |  | $                           | 4,859 |      | $                         | 4,766  |  | $ | 93   |   |  | 2.0   | %      |      | $ | 9,420 |  | $ | 10,126 |  | $ | (706   | ) |  | (7.0  | )%
|                                    |  |                             |       |      |                           |        |  |   |      |   |  |       |        |      |   |       |  |   |        |  |   |        |   |  |       |   

Non-interest income comprised 30.3% of total revenue in the second quarter of 2010 compared with 31.0% in the
year-ago quarter and 29.1% in the first quarter of 2010.

Non-interest income decreased $706,000 or 7.0% in the first half of 2010 compared
with the year-ago period. The decrease is primarily the result of the recognition of $1.0 million in pre-tax gains on the sale of securities in the first quarter of 2009. There were no securities gains realized in 2010. Adjusted for the effect of
these gains, non-interest income increased $309,000 primarily due to increases in investment management income, electronic customer transaction fees and gains on sales of loans. Partly offsetting these increases was an 11% decline in service charges
on deposit accounts compared to the first half of 2009 due primarily to a general decline in overdraft fee income likely the result of heightened customer sensitivities to incurring overdraft fees. We expect that new regulations relating to
overdrafts effective in the third quarter of 2010 will negatively impact our overdraft fee income, though the likely amount of impact cannot be determined. Excluding the effect of securities gains, non-interest income was 29.7% of total revenue in
the first half of 2010 compared with 30.6% in the year-ago period.



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Non-interest Expenses

The following table sets forth certain information on non-interest expenses for the periods indicated, dollars in thousands:



|                                  |  |                                 |        |      |                               |        |  |   |      |   |  |       |        |      |   |        |  |   |        |  |   |       |   |  |       |   
|--------------------------------- |  | ------------------------------- | ------ | ---- | ----------------------------- | ------ |  | - | ---- | - |  | ----- | ------ | ---- | - | ------ |  | - | ------ |  | - | ----- | - |  | ----- | --
|                                  |  | For three months ended June 30, |        |      | For six months ended June 30, |       
|                                  |  |                                 |        |      |                               | Change |  |   |      |   |  |       | Change |     
|                                  |  | 2010                            |        | 2009 |                               | $      |  |   | %    |   |  | 2010  |        | 2009 |   | $      |  |   | %      | 
|Salaries and benefits             |  | $                               | 5,370  |      | $                             | 4,721  |  | $ | 649  |   |  | 13.7  | %      |      | $ | 10,939 |  | $ | 9,421  |  | $ | 1,518 |   |  | 16.1  | % 
|Occupancy and equipment           |  |                                 | 1,840  |      |                               | 1,787  |  |   | 53   |   |  | 3.0   | %      |      |   | 3,680  |  |   | 3,551  |  |   | 129   |   |  | 3.6   | % 
|Communication expense             |  |                                 | 157    |      |                               | 196    |  |   | (39  | ) |  | (19.9 | )%     |      |   | 333    |  |   | 387    |  |   | (54   | ) |  | (14.0 | )%
|Office supplies and postage       |  |                                 | 300    |      |                               | 301    |  |   | (1   | ) |  | (0.3  | )%     |      |   | 569    |  |   | 612    |  |   | (43   | ) |  | (7.0  | )%
|Marketing expense                 |  |                                 | 391    |      |                               | 248    |  |   | 143  |   |  | 57.7  | %      |      |   | 684    |  |   | 499    |  |   | 185   |   |  | 37.1  | % 
|Amortization of intangible assets |  |                                 | 290    |      |                               | 387    |  |   | (97  | ) |  | (25.1 | )%     |      |   | 580    |  |   | 775    |  |   | (195  | ) |  | (25.2 | )%
|Professional fees                 |  |                                 | 829    |      |                               | 754    |  |   | 75   |   |  | 9.9   | %      |      |   | 1,569  |  |   | 1,431  |  |   | 138   |   |  | 9.6   | % 
|FDIC insurance                    |  |                                 | 404    |      |                               | 1,039  |  |   | (635 | ) |  | (61.1 | )%     |      |   | 806    |  |   | 1,386  |  |   | (580  | ) |  | (41.8 | )%
|Other operating expenses          |  |                                 | 1,382  |      |                               | 1,466  |  |   | (84  | ) |  | (5.7  | )%     |      |   | 2,765  |  |   | 2,904  |  |   | (139  | ) |  | (4.8  | )%
|                                  |  |                                 |        |      |                               |        |  |   |      |   |  |       |        |      |   |        |  |   |        |  |   |       |   |  |       |   
|Total operating expenses          |  | $                               | 10,963 |      | $                             | 10,899 |  | $ | 64   |   |  | (0.6  | )%     |      | $ | 21,925 |  | $ | 20,966 |  | $ | 959   |   |  | 4.6   | % 
|                                  |  |                                 |        |      |                               |        |  |   |      |   |  |       |        |      |   |        |  |   |        |  |   |       |   |  |       |   

Non-interest expenses were relatively unchanged in the second quarter compared to the year-ago quarter. Salaries
and benefits increased $649,000 or 13.7% due primarily to a combination of new customer service and business development positions, normal salary increases and a lack of incentive compensation expense in the second quarter of 2009. FDIC insurance
expense decreased $635,000 or 61.1% in the second quarter compared with the second quarter of 2009 due to a special assessment required of all FDIC insured banks. The assessment for Alliance was $676,000 in the second quarter of 2009.

Non-interest expenses increased $959,000 or 4.6% in the six months ended June 30, 2010 compared with the first half of 2009. Salaries and benefits
expense increased $1.5 million or 16.1% compared with the first half of 2009, with approximately $893,000 or 59% of this increase representing incremental recurring expense from the new positions discussed above, normal salary increases and a lack
of incentive compensation expense in the first half of 2009. As required under generally accepted accounting principles, the deferral of salaries and benefits expense in connection with successfully originated loans comprised approximately $300,000
or 36% of the increase in salaries and benefits in 2010 compared with the same period in 2009, due to the substantially higher residential mortgage origination volume in 2009.

FDIC insurance expense decreased $580,000 or 41.8% compared with the first half of 2009 due primarily to the special assessment paid by Alliance in the
second quarter of 2009.

Our efficiency ratio was 68.3% in the second quarter of 2010 compared with 70.8% in the year-ago quarter and 69.9% in
the first quarter of 2010. Our efficiency ratio was 69.1% in the six months ended June 30, 2010 compared with 70.4% in the year-ago period.

Income Taxes

Our effective tax rate was
25.0% and 24.6% for the three months and six months ended June 30, 2010, respectively, compared with 24.3% and 20.5% in the year-ago periods, respectively. The increase in the effective tax rate is due to a decrease in tax exempt income as a
percentage of total taxable income.

Comparison of Financial Condition at June 30, 2010 and December 31, 2009

General

Total assets increased $39.5
million or 2.8% in the first six months of 2010 and were $1.5 billion at June 30, 2010. Securities available-for-sale increased $44.6 million or 12.3%. Total assets increased $11.4 million from the end of the first quarter primarily resulting
from a $10.5 million increase in total loans and leases (net of unearned income) to $915.2 million at June 30, 2010.

Securities

Investment securities totaled $406.8 million at June 30, 2010, as compared with $362.2 million at December 31, 2009. Nearly all of
our securities are rated by nationally recognized rating agencies, with most of these ratings being AAA by one or more of these rating agencies. The breakdown of our securities portfolio at June 30, 2010 is 80% U.S. government
guaranteed mortgage-



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##### Table of Contents

backed securities, 18% municipal securities and 1% obligations of U.S. government sponsored corporations. Mortgage-backed securities, which totaled $326.4 million at June 30, 2010, are
comprised primarily of pass-through securities backed by conventional residential mortgages and guaranteed by Fannie-Mae, Freddie-Mac or Ginnie Mae, which in turn are backed by the United States government. The average life of the mortgage-backed
securities portfolio is approximately 4.3 years. We do not invest in any securities backed by sub-prime, Alt-A or other high-risk mortgages. We also do not hold any preferred stock, corporate debt or trust preferred securities in our investment
portfolio. Our municipal securities portfolio, which totaled $71.6 million at the end of the second quarter, is comprised primarily of highly rated general obligation bonds issued by local municipalities in New York State.

Net unrealized gains in the securities portfolio totaled $11.8 million at June 30, 2010, compared with net unrealized gains of $4.6 million at
December 31, 2009.

Loans and Leases

Total loans and leases, net of unearned income and deferred costs, were $915.2 million at June 30, 2010, compared with $904.7 at March 31, 2010
and $914.2 million at December 31, 2009.

Commercial loans and mortgages increased $16.3 million in the second quarter and totaled $227.9
million at June 30, 2010 through a combination of increased utilization of existing commercial lines of credit and new loan originations. Originations of commercial loans (excluding lines of credit) in the second quarter totaled $13.3 million,
compared with $8.9 million in the first quarter of 2010 and $10.8 million in the year-ago quarter. We have generated an increased pipeline of commercial loans in the second quarter as the result of successfully executing the growth strategy of
developing relationships with new credit-worthy businesses seeking the stability that comes of working with a financially strong, locally based community bank.

Residential mortgages outstanding were nearly unchanged in the second quarter, and totaled $354.5 million at June 30, 2010. Residential mortgage
origination volume contracted to more moderate levels in the first half of 2010 as slightly higher average borrowing rates early in 2010 combined with exceptionally high mortgage refinance activity in 2009, driven by historically low interest rates
during that period, have contributed to a general decline in mortgage originations in our market. Originations of residential mortgages totaled $27.1 million in the second quarter of 2010, compared with $19.3 million in the first quarter of 2010 and
$48.9 million in the year-ago quarter. Originations for the first half of 2010 were $46.4 million, compared with $96.2 million in the first half of 2009. Despite the decline in our origination volumes, we have maintained our position as one of the
top providers of residential mortgages in Central New York.

Indirect auto loan balances increased $1.9 million to $183.4 million at the end
of the second quarter. We originated $25.3 million of indirect auto loans in the second quarter, compared with $17.2 million in the first quarter of 2010 and $32.3 million in the year-ago quarter. We originate auto loans through a network of
reputable, well established automobile dealers located in Central and Western New York. Applications received through our indirect lending program are subject to the same comprehensive underwriting criteria and procedures as employed in our direct
lending programs.

Leases (net of unearned income) decreased $7.0 million in the second quarter as a result of the previously announced
decision to cease new lease originations. The remaining balance of the net lease portfolio of $54.4 million is expected to continue to run-off at the rate of approximately $6 million per quarter over the next twelve months.

The following table sets forth the composition of our loan and lease portfolio at the dates indicated, dollars in thousands:



|                                |  |               |         |   |         |       |   |                   |   |         |         |  |       |  
|------------------------------- |  | ------------- | ------- | - | ------- | ----- | - | ----------------- | - | ------- | ------- |  | ----- | -
|                                |  | June 30, 2010 |         |   | Percent |       |   | December 31, 2009 |   |         | Percent | 
|                                |  |               |         |  
|Residential real estate         |  | $             | 354,544 |   |         | 38.9  | % |                   | $ | 356,906 |         |  | 39.2  | %
|Commercial loans                |  |               | 122,714 |   |         | 13.5  | % |                   |   | 111,243 |         |  | 12.2  | %
|Commercial real estate          |  |               | 105,157 |   |         | 11.5  | % |                   |   | 96,753  |         |  | 10.7  | %
|Leases (net of unearned income) |  |               | 54,402  |   |         | 6.0   | % |                   |   | 68,224  |         |  | 7.5   | %
|Indirect auto                   |  |               | 183,410 |   |         | 20.1  | % |                   |   | 184,947 |         |  | 20.3  | %
|Other consumer loans            |  |               | 91,073  |   |         | 10.0  | % |                   |   | 92,022  |         |  | 10.1  | %
|                                |  |               |         |   |         |       |   |                   |   |         |         |  |       |  
|                                |  | $             | 911,300 |   |         | 100.0 | % |                   | $ | 910,095 |         |  | 100.0 | %
|                                |  |               |         |   |         |       |   |                   |   |         |         |  |       |  
|Net deferred loan costs         |  |               | 3,851   |   |         |       |   |                   |   | 4,067   |         |  |       |  
|                                |  |               |         |   |         |       |   |                   |   |         |         |  |       |  
|Total loans and leases          |  |               | 915,151 |   |         |       |   |                   |   | 914,162 |         |  |       |  
|Allowance for credit losses     |  |               | (10,293 | ) |         |       |   |                   |   | (9,414  | )       |  |       |  
|                                |  |               |         |   |         |       |   |                   |   |         |         |  |       |  
|Net loans and leases            |  | $             | 904,858 |   |         |       |   |                   | $ | 904,748 |         |  |       |  
|                                |  |               |         |   |         |       |   |                   |   |         |         |  |       |  



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Deposits

Deposits were $1.1 billion at June 30, 2010, which was $11.8 million less than the end of the first quarter, but were up $42.5 million compared with
the end of 2009. Municipal money market accounts decreased $27.2 million during the quarter due largely to the seasonality of municipal cash flows. Our deposit mix remains favorably weighted in lower cost demand, savings and money market accounts,
which comprised 67.3% of total deposits at the end of the second quarter, compared with 65.2% at December 31, 2009 and 60.2% at June 30, 2009.

The following table sets forth the composition of our deposits by business line at the dates indicated, dollars in thousands:



|                      |  |               |         |            |                   |           |  |       |         |         |   |           |        |       |            |  |           |         |       |   |         |  |   |         |  |   |           |  |       |  
|--------------------- |  | ------------- | ------- | ---------- | ----------------- | --------- |  | ----- | ------- | ------- | - | --------- | ------ | ----- | ---------- |  | --------- | ------- | ----- | - | ------- |  | - | ------- |  | - | --------- |  | ----- | -
|                      |  | June 30, 2010 |         |            | December 31, 2009 |          
|                      |  | Retail        |         | Commercial |                   | Municipal |  | Total |         | Percent |   |           | Retail |       | Commercial |  | Municipal |         | Total |   | Percent | 
|                      |  |               |         |            |                   |           |  |       |         |        
|Non-interest checking |  | $             | 41,529  |            | $                 | 116,966   |  | $     | 3,652   |         | $ | 162,147   |        | 14.5  | %          |  | $         | 40,320  |       | $ | 115,304 |  | $ | 3,525   |  | $ | 159,149   |  | 14.8  | %
|Interest checking     |  |               | 103,770 |            |                   | 15,029    |  |       | 22,540  |         |   | 141,339   |        | 12.6  | %          |  |           | 97,580  |       |   | 15,559  |  |   | 17,229  |  |   | 130,368   |  | 12.1  | %
|                      |  |               |         |            |                   |           |  |       |         |         |   |           |        |       |            |  |           |         |       |   |         |  |   |         |  |   |           |  |       |  
|Total checking        |  |               | 145,299 |            |                   | 131,995   |  |       | 26,192  |         |   | 303,486   |        | 27.1  | %          |  |           | 137,900 |       |   | 130,863 |  |   | 20,754  |  |   | 289,517   |  | 26.9  | %
|                      |  |               |         |            |                   |           |  |       |         |        
|Savings               |  |               | 89,422  |            |                   | 11,157    |  |       | 2,949   |         |   | 103,528   |        | 9.3   | %          |  |           | 82,328  |       |   | 9,714   |  |   | 2,482   |  |   | 94,524    |  | 8.8   | %
|Money market          |  |               | 86,643  |            |                   | 94,685    |  |       | 164,057 |         |   | 345,385   |        | 30.9  | %          |  |           | 82,103  |       |   | 96,760  |  |   | 138,188 |  |   | 317,051   |  | 29.5  | %
|Time deposits         |  |               | 293,343 |            |                   | 23,830    |  |       | 48,598  |         |   | 365,771   |        | 32.7  | %          |  |           | 311,626 |       |   | 20,568  |  |   | 42,385  |  |   | 374,579   |  | 34.8  | %
|                      |  |               |         |            |                   |           |  |       |         |         |   |           |        |       |            |  |           |         |       |   |         |  |   |         |  |   |           |  |       |  
|Total deposits        |  | $             | 614,707 |            | $                 | 261,667   |  | $     | 241,796 |         | $ | 1,118,170 |        | 100.0 | %          |  | $         | 613,957 |       | $ | 257,905 |  | $ | 203,809 |  | $ | 1,075,671 |  | 100.0 | %
|                      |  |               |         |            |                   |           |  |       |         |         |   |           |        |       |            |  |           |         |       |   |         |  |   |         |  |   |           |  |       |  

Liquidity

Alliances liquidity primarily reflects the Banks ability to provide funds to meet loan and lease requests, to accommodate possible outflows in
deposits, to take advantage of market interest rate opportunities, and to pay dividends to Alliance. Funding loan and lease commitments, providing for deposit outflows, settling other liabilities when they come due and managing of interest rate
fluctuations require continuous analysis in order to match the maturities of specific categories of short-term loans and leases and investments with specific types of deposits, borrowings and other liabilities. Liquidity is normally considered in
terms of the nature and mix of the Banks sources and uses of funds. The Asset Liability Committee (ALCO) of Alliance is responsible for implementing the policies and guidelines for the maintenance of prudent levels of liquidity. As
of June 30, 2010, liquidity as measured by the Bank is in compliance with and exceeds its policy guidelines.

Our principal sources of
funds for operations are cash flows generated from earnings, deposit inflows, loan and lease repayments, borrowings from the FHLB, and securities sold under repurchase agreements. During the six months ended June 30, 2010, cash and cash
equivalents decreased by $1.6 million, as net cash used in investing activities of $41.1 million exceeded net cash provided by operating and financing activities of $39.5 million. Net cash used in investing activities primarily resulted from
securities purchases exceeding maturities, sales and principal repayments by $38.6 million. Net cash provided by financing activities in the second quarter principally reflects a $42.5 million net increase in deposits, partly reduced by a net
decrease in borrowings of $11.3 million and cash dividends of $2.6 million. Net cash from operating activities was primarily provided by net income in the amount of $5.7 million.

As a member of the FHLB, we are eligible to borrow up to a specific credit limit which is determined by the amount of our residential mortgages,
commercial mortgages and investment securities that have been pledged as collateral. As of June 30, 2010, our credit limit with the FHLB was $308.7 million. The total of our outstanding borrowings from the FHLB on that date was $142.8 million.

At June 30, 2010, we had a $149.3 million line of credit with the Federal Reserve Bank of New York through its Discount Window. We have
pledged indirect auto loans and investment securities totaling $183.0 million and $6.0 million, respectively, at June 30, 2010. At June 30, 2010, we also had available $76.5 million of unsecured federal funds lines of credit with other
financial institutions. We did not draw any amounts on any of these lines during the quarter other than an overnight test to confirm their availability. There were no amounts outstanding on any of these lines at June 30, 2010.

Capital Resources

We use certain
non-GAAP financial measures, such as the Tangible Common Equity to Tangible Assets ratio (TCE), to provide information for investors to effectively analyze financial trends of ongoing business activities, and to enhance comparability with peers
across the financial sector. We believe TCE is useful because it is a measure utilized by regulators, market analysts and investors in evaluating a companys financial condition and capital strength. TCE, as defined by Alliance, represents
common equity less goodwill and intangible assets. A reconciliation from the our GAAP Total Equity to Total Assets ratio to the Non-GAAP Tangible Common Equity to Tangible Assets ratio is presented below:



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|                                                  |  |               |           |  
|------------------------------------------------- |  | ------------- | --------- | -
|(in thousands)                                    |  | June 30, 2010 |          
|Total assets                                      |  | $             | 1,456,731 |  
|Less: Goodwill and intangible assets, net         |  |               | 41,568    |  
|                                                  |  |               |           |  
|Tangible assets (non-GAAP)                        |  | $             | 1,415,163 |  
|                                                  | 
|Total Common Equity                               |  |               | 132,712   |  
|Less: Goodwill and intangible assets, net         |  |               | 41,568    |  
|                                                  |  |               |           |  
|Tangible Common Equity (non-GAAP)                 |  |               | 91,144    |  
|                                                  | 
|Total Equity/Total Assets                         |  |               | 9.11      | %
|Tangible Common Equity/Tangible Assets (non-GAAP) |  |               | 6.44      | %

Shareholders equity was $132.7
million at June 30, 2010, compared with $123.9 million at the December 31, 2009. Net income for the first half of 2009 increased shareholders equity by $5.7 million and was partially offset by common stock dividends declared of $2.6
million or $0.56 per common share. Accumulated other comprehensive income included in shareholders equity increased $4.5 million during 2010 due primarily to higher net unrealized gains on securities available-for-sale, resulting from lower
interest rates during 2010 and other market factors.

Our Tier 1 leverage ratio was 7.87% and its total risk-based capital ratio was 13.88% at
the end of the second quarter, both of which exceeded regulatory minimum thresholds for capital adequacy purposes. Our tangible common equity capital ratio was 6.44% at June 30, 2010.

Alliance and its banking subsidiary are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital
amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require Alliance and the Bank to
maintain minimum amounts and ratios (set forth in the following tables) of total and Tier 1 Capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 Capital (as defined) to average assets (as defined).

As of December 31, 2009, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as
well-capitalized, under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the
following table. Management believes that, as of June 30, 2010, Alliance and the Bank met all capital adequacy requirements to which they were subject.



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The following table compares Alliances actual capital amounts and ratios with those needed to qualify
for the well capitalized category, which is the highest capital category as defined in the regulations.



|                         |  |        |         |       |                              |   |        |                                                                 |        |  |       |        |  |        |  |        |  
|------------------------ |  | ------ | ------- | ----- | ---------------------------- | - | ------ | --------------------------------------------------------------- | ------ |  | ----- | ------ |  | ------ |  | ------ | -
|                         |  | Actual |         |       | For CapitalAdequacy Purposes |   |        | To Be Well 
CapitalizedUnder Prompt CorrectiveAction Provisions |       
|                         |  | Amount |         | Ratio |                              |   | Amount |                                                                 | Ratio  |  |       | Amount |  | Ratio  | 
|As of June 30, 2010      |  |        |         |       |                              |   |        |                                                                 |        |  |       |        |  |        |  |        |  
|Total risk-based capital |  |        |         |       |                              |   |        |                                                                 |        |  |       |        |  |        |  |        |  
|Alliance                 |  | $      | 121,086 |       | 13.88                        | % |        | $                                                               | 69,814 |  | 38.00 | %      |  | N/A    |  | N/A    |  
|Bank                     |  |        | 115,107 |       | 13.32                        | % |        |                                                                 | 69,150 |  | 38.00 | %      |  | 86,437 |  | 310.00 | %
|Tier 1 capital           |  |        |         |       |                              |   |        |                                                                 |        |  |       |        |  |        |  |        |  
|Alliance                 |  |        | 110,783 |       | 12.70                        | % |        |                                                                 | 34,907 |  | 34.00 | %      |  | N/A    |  | N/A    |  
|Bank                     |  |        | 104,804 |       | 12.12                        | % |        |                                                                 | 34,575 |  | 34.00 | %      |  | 51,862 |  | 36.00  | %
|Leverage                 |  |        |         |       |                              |   |        |                                                                 |        |  |       |        |  |        |  |        |  
|Alliance                 |  |        | 110,783 |       | 7.87                         | % |        |                                                                 | 56,275 |  | 34.00 | %      |  | N/A    |  | N/A    |  
|Bank                     |  |        | 104,804 |       | 7.48                         | % |        |                                                                 | 56,033 |  | 34.00 | %      |  | 70,041 |  | 35.00  | %
|                         |  |        |         |       |                              |  
|As of December 31, 2009  |  |        |         |       |                              |   |        |                                                                 |        |  |       |        |  |        |  |        |  
|Total risk-based capital |  |        |         |       |                              |   |        |                                                                 |        |  |       |        |  |        |  |        |  
|Alliance                 |  | $      | 115,308 |       | 13.14                        | % |        | $                                                               | 70,210 |  | 38.00 | %      |  | N/A    |  | N/A    |  
|Bank                     |  |        | 109,208 |       | 12.55                        | % |        |                                                                 | 69,595 |  | 38.00 | %      |  | 86,994 |  | 310.00 | %
|Tier 1 capital           |  |        |         |       |                              |   |        |                                                                 |        |  |       |        |  |        |  |        |  
|Alliance                 |  |        | 105,894 |       | 12.07                        | % |        |                                                                 | 35,105 |  | 34.00 | %      |  | N/A    |  | N/A    |  
|Bank                     |  |        | 99,794  |       | 11.47                        | % |        |                                                                 | 34,798 |  | 34.00 | %      |  | 52,196 |  | 36.00  | %
|Leverage                 |  |        |         |       |                              |   |        |                                                                 |        |  |       |        |  |        |  |        |  
|Alliance                 |  |        | 105,894 |       | 7.55                         | % |        |                                                                 | 56,113 |  | 34.00 | %      |  | N/A    |  | N/A    |  
|Bank                     |  |        | 99,794  |       | 7.14                         | % |        |                                                                 | 55,873 |  | 34.00 | %      |  | 69,841 |  | 35.00  | %

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency
exchange rates, commodity prices, and equity prices. Alliances market risk arises principally from interest rate risk in its lending, investing, deposit gathering and borrowing activities. Other types of market risks do not arise in the normal
course of our business activities.

The Banks ALCO is responsible for reviewing the interest rate sensitivity position and establishing
policies to monitor and manage exposure to interest rate risk. The policies and guidelines established by the ALCO are reviewed and approved by the Companys Board of Directors annually.

Interest rate risk is monitored primarily through financial modeling of net interest income and net portfolio value estimation (discounted present value
of assets minus discounted present value of liabilities). Both measures are highly assumption dependent and change regularly as the balance sheet and interest rates change; however, taken together, they represent a reasonably comprehensive view of
the magnitude of interest rate risk, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships. The key assumptions employed by these measures are
analyzed and reviewed monthly by the ALCO.

The table that follows is provided pursuant to the market risk disclosure rules set forth in
Item 305 of Regulation S-K of the Securities and Exchange Commission. The information provided in the following table is based on significant estimates and assumptions and constitutes, like certain other statements included herein, a
forward-looking statement. The base case (no rate change) information in the table shows (1) an estimate of Alliances net portfolio value at June 30, 2010 arrived at by discounting estimated future cash flows at current market
rates and (2) an estimate of net interest income for the twelve months ending June 30, 2011 assuming that maturing assets or liabilities are replaced with new balances of the same type, in the same amount, and at current (June 30, 2010)
rate levels and repricing balances are adjusted to current (June 30, 2010) rate levels. The rate change information (rate shocks) in the table shows estimates of net portfolio value at June 30, 2010 and net interest income for the twelve
months ending June 30, 2011 assuming instantaneous rate changes of up 100, 200, and 300 basis points and down 100 basis points. Cash flows for non-maturity deposits are based on a decay or runoff rate based on average account
age. Rate changes in the rate shock scenario are assumed to be shock or immediate changes and occur uniformly across the yield curve. In projecting future net interest income under the rate shock scenarios, activity is simulated by
replacing maturing balances with new balances of the same type, in the same amount, but at the assumed post shock rate levels. Balances that reprice are assumed to reprice at post shock rate levels.



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Based on the foregoing assumptions and as depicted in the table that follows, an immediate increase in
interest rates of 100, 200, or 300 basis points would have a negative effect on net interest income over a twelve month time period. This is principally because the Banks interest-bearing deposit accounts are assumed to reprice faster
than its loans and investment securities. However, if the Bank does not increase the rates paid on its deposit accounts as quickly or to the same magnitude as increases in market interest rates, the negative impact on net interest income will
likely be lower. Over a longer period of time, and assuming that interest rates remain stable after the initial rate increase and the Bank purchases securities and originates loans at yields higher than those maturing and reprices loans at
higher yields, the impact of an increase in interest rates should be positive. This occurs primarily because with the passage of time more loans and investment securities will reprice at the higher rates and there will be no offsetting increase
in interest expense for those loans and investment securities funded by noninterest-bearing checking deposits and capital. Generally, the reverse should be true of an immediate decrease in interest rates of 100 basis points. However, the
positive impact on net interest income of a decline in interest rates of 100 basis points is currently constrained by the absolute low level of deposit and borrowing rates.



|                            |  |                                      |         |                  |                                                        |         |         |  |                  |        |  |        |        |  |         |         |   |  |       |   
|--------------------------- |  | ------------------------------------ | ------- | ---------------- | ------------------------------------------------------ | ------- | ------- |  | ---------------- | ------ |  | ------ | ------ |  | ------- | ------- | - |  | ----- | --
|                            |  | Net Portfolio Value at June 30, 2010 |         |                  | Net Interest 
IncomeTwelve Months Ending June 30, 2011 |        
|                            |  |                                      |         | Change from Base |                                                        |         |         |  | Change from Base |       
|Rate Change Scenario        |  | Amount                               |         | Dollar           |                                                        |         | Percent |  |                  | Amount |  | Dollar |        |  | Percent |        
|                            |  | (Dollars in thousands)               |        
|+300 basis point rate shock |  | $                                    | 205,427 |                  | $                                                      | (52,702 | )       |  | (20.4            | )%     |  | $      | 35,783 |  | $       | (11,383 | ) |  | (24.1 | )%
|+200 basis point rate shock |  |                                      | 219,781 |                  |                                                        | (38,348 | )       |  | (14.9            | )%     |  |        | 39,964 |  |         | (7,202  | ) |  | (15.3 | )%
|+100 basis point rate shock |  |                                      | 240,297 |                  |                                                        | (17,832 | )       |  | (6.9             | )%     |  |        | 44,149 |  |         | (3,017  | ) |  | (6.4  | )%
|Base case (no rate change)  |  |                                      | 258,129 |                  |                                                        |        |         |  |                 | %      |  |        | 47,166 |  |         |        |   |  |      | % 
|-100 basis point rate shock |  |                                      | 253,826 |                  |                                                        | (4,303  | )       |  | (1.7             | )%     |  |        | 48,076 |  |         | 910     |   |  | 1.9   | % 

ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES

Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Alliances disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) ), as of the end of the period covered by this report. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and
procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required, and (ii) accumulated and
communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter that materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable.

ITEM 1A RISK FACTORS

For a summary of risk factors relevant to our operations, see Part I, Item 1A, Risk Factors in our 2009 Annual Report. There are no
material changes in the risk factors relevant to our operations, except as discussed below:

Compliance with the recently enacted
Dodd-Frank Reform Act may increase our costs of operations and adversely impact our earnings.

On July 21, 2010, President Obama
signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) into law. The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial-services
industry. Among other things, the Dodd-Frank Act creates a new federal financial consumer protection agency, tightens capital standards, imposes clearing and margining requirements on many derivatives activities, and generally increases
oversight and regulation of financial institutions and financial activities. In addition to the self-implementing provisions of the statute, the Dodd-Frank Act calls for many administrative rulemakings by various federal agencies to
implement various parts of the legislation. It is impossible to predict when any final rules would be issued through any such rulemakings, and what the content of such rules will be. The financial reform legislation and any implementing rules
that are ultimately issued could have adverse implications on the financial industry, the competitive environment, and our business. We will have to apply resources to ensure that we are in compliance with all applicable provisions of the Dodd-Frank
Act and any implementing rules, which may increase our costs of operations and adversely impact our earnings.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



|a) | Not applicable
|-- | --------------



|b) | Not applicable
|-- | --------------



|c) | Not applicable
|-- | --------------

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. REMOVED AND RESERVED

ITEM 5. OTHER INFORMATION

Not applicable

ITEM 6. EXHIBITS

The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index attached hereto and are incorporated
herein by reference.



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



|                     |  |  |  |  |  |                                                             
|-------------------- |  |  |  |  |  | ------------------------------------------------------------
|                     |  |  |  |  |  | ALLIANCE FINANCIAL CORPORATION                              
|                     |  |  | 
|DATE: August 6, 2010 |  |  |  |  |  | /s/ Jack H. Webb                                            
|                     |  |  |  |  |  | Jack H. Webb                                                
|                     |  |  |  |  |  | Chairman of the Board, President and Chief Executive Officer
|                     |  |  |  |  |  | (Principal Executive Officer)                               
|                     |  |  | 
|DATE: August 6, 2010 |  |  |  |  |  | /s/ J. Daniel Mohr                                          
|                     |  |  |  |  |  | J. Daniel Mohr                                              
|                     |  |  |  |  |  | Executive Vice President and Chief Financial Officer        
|                     |  |  |  |  |  | (Principal Financial and Accounting Officer)                



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##### Table of Contents

EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|              | 
|3.1           |  | Amended and Restated Certificate of Incorporation of Alliance (incorporated herein by reference to exhibit 3.1 to Alliances Registration Statement on Form S-4 (Registration
No. 333-62623) filed with the Commission on August 27, 2009)                                                                                                                                                                                                              
|              | 
|3.2           |  | Amended and Restated Bylaws of Alliance (incorporated herein by reference to exhibit 3.2 to Alliances Current Report on Form 8-K filed with the Commission on September 3,
2004)                                                                                                                                                                                                                                                                       
|              | 
|3.3           |  | Amended and Restated Bylaws of Alliance (incorporated herein by reference to exhibit 3.3 to Alliances Current Report on Form 8-K filed with the Commission on November 27,
2007)                                                                                                                                                                                                                                                                       
|              | 
|4.1           |  | Rights Agreement dated October 19, 2001 between Alliance
Financial Corporation and American Stock Transfer & Trust Company, including the Certificate of Amendment to Alliances Certificate of Incorporation, the form of Rights Certificate and the
Summary of Rights attached thereto as Exhibits A, B, and C, respectively (incorporated herein by reference to exhibit 4.1 to Alliances Form 8-A12G filed with the Commission on October 25, 2001)
|              | 
|10.1          |  | Alliance Financial Corporation 2010 Restricted Stock Plan dated May 11, 2010                                                                                                                                                                                                                                                                                                                                                                            
|              | 
|31.1          |  | Certification of Jack H. Webb, Chairman of the Board, President and Chief Executive Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002                                                                                                                                                                                                                                                                                
|              | 
|31.2          |  | Certification of J. Daniel Mohr, Executive Vice President and Chief Financial Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                      
|              | 
|32.1          |  | Certification of Jack H. Webb, Chairman of the Board, President and Chief Executive Officer of the Registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                 
|              | 
|32.2          |  | Certification of J. Daniel Mohr, Executive Vice President and Chief Financial Officer of the Registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                       



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