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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549





FORM 10-Q







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

For the Quarterly Period Ended September 30, 2008

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) 475-4478

(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 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.



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|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 October 31, 2008 was 4,578,910 shares.









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##### Table of Contents

TABLE OF CONTENTS



|         |  |                       |  |                                                                                       |  |              
|-------- |  | --------------------- |  | ------------------------------------------------------------------------------------- |  | -------------
|         |  |                       |  |                                                                                       |  | PageNumber(s)
|Part I.  |  | FINANCIAL INFORMATION |  |                                                                                      
|         |  |                       | 
|         |  | Item 1.               |  | Financial Statements (All Unaudited)                                                  |  |              
|         |  |                       | 
|         |  |                       |  | Consolidated Balance Sheets                                                           |  | 3            
|         |  |                       |  | Consolidated Statements of Income                                                     |  | 4            
|         |  |                       |  | Consolidated Statements of Changes in Shareholders Equity                            |  | 5            
|         |  |                       |  | Consolidated Statements of Cash Flow                                                  |  | 6            
|         |  |                       |  | Notes to Consolidated Financial Statements                                            |  | 7-13         
|         |  |                       | 
|         |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 14-28        
|         |  |                       | 
|         |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 29           
|         |  |                       | 
|         |  | Item 4.               |  | Controls and Procedures                                                               |  | 29           
|         |  |                      
|Part II. |  | OTHER INFORMATION     |  |                                                                                      
|         |  |                       | 
|         |  | Item 1.               |  | Legal Proceedings                                                                     |  | 30           
|         |  |                       | 
|         |  | Item 1A.              |  | Risk Factors                                                                          |  | 30           
|         |  |                       | 
|         |  | Item 2.               |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 30           
|         |  |                       | 
|         |  | Item 3.               |  | Defaults Upon Senior Securities                                                       |  | 30           
|         |  |                       | 
|         |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                   |  | 30           
|         |  |                       | 
|         |  | Item 5.               |  | Other Information                                                                     |  | 30           
|         |  |                       | 
|         |  | Item 6.               |  | Exhibits                                                                              |  | 31           
|         |  |                      
|         |  | Signatures            |  | 32                                                                                   



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##### Table of Contents

Alliance Financial Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)



(In thousands, except share data)



|                                                                                                                                                                 |  |                   |           |   |                  |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                 |  | September 30,2008 |           |   | December 31,2007 |  
|Assets                                                                                                                                                           |  |                   |           |   |                  |   |           |  
|Cash and due from banks                                                                                                                                          |  | $                 | 28,581    |   |                  | $ | 30,704    |  
|Securities available-for-sale                                                                                                                                    |  |                   | 290,248   |   |                  |   | 272,713   |  
|Federal Home Loan Bank of New York (FLHB) and Federal Reserve Bank (FRB) stock                                                                               |  |                   | 12,073    |   |                  |   | 9,507     |  
|Loans and leases held-for-sale                                                                                                                                   |  |                   | 131       |   |                  |   | 3,163     |  
|Loans and leases, net of unearned income                                                                                                                         |  |                   | 916,030   |   |                  |   | 895,533   |  
|Allowance for credit losses                                                                                                                                      |  |                   | 8,875     |   |                  |   | 8,426     |  
|                                                                                                                                                                 |  |                   |           |   |                  |   |           |  
|Net loans and leases                                                                                                                                             |  |                   | 907,155   |   |                  |   | 887,107   |  
|                                                                                                                                                                 |  |                  
|Premises and equipment, net                                                                                                                                      |  |                   | 20,703    |   |                  |   | 21,560    |  
|Accrued interest receivable                                                                                                                                      |  |                   | 5,074     |   |                  |   | 4,501     |  
|Bank-owned life insurance                                                                                                                                        |  |                   | 24,690    |   |                  |   | 17,084    |  
|Assets held for sale                                                                                                                                             |  |                   | 724       |   |                  |   | 801       |  
|Goodwill                                                                                                                                                         |  |                   | 32,073    |   |                  |   | 32,187    |  
|Intangible assets, net                                                                                                                                           |  |                   | 11,916    |   |                  |   | 13,183    |  
|Other assets                                                                                                                                                     |  |                   | 13,852    |   |                  |   | 14,504    |  
|                                                                                                                                                                 |  |                   |           |   |                  |   |           |  
|Total assets                                                                                                                                                     |  | $                 | 1,347,220 |   |                  | $ | 1,307,014 |  
|                                                                                                                                                                 |  |                   |           |   |                  |   |           |  
|Liabilities and shareholders equity                                                                                                                             |  |                   |           |   |                  |   |           |  
|Liabilities                                                                                                                                                      |  |                   |           |   |                  |   |           |  
|Deposits:                                                                                                                                                        |  |                   |           |   |                  |   |           |  
|Non-interest-bearing deposits                                                                                                                                    |  | $                 | 135,359   |   |                  | $ | 138,691   |  
|Interest-bearing deposits                                                                                                                                        |  |                   | 810,050   |   |                  |   | 806,539   |  
|                                                                                                                                                                 |  |                   |           |   |                  |   |           |  
|Total deposits                                                                                                                                                   |  |                   | 945,409   |   |                  |   | 945,230   |  
|Borrowings                                                                                                                                                       |  |                   | 242,961   |   |                  |   | 200,757   |  
|Accrued interest payable                                                                                                                                         |  |                   | 2,843     |   |                  |   | 3,903     |  
|Other liabilities                                                                                                                                                |  |                   | 15,031    |   |                  |   | 15,790    |  
|Junior subordinated obligations issued to unconsolidated subsidiary trusts                                                                                       |  |                   | 25,774    |   |                  |   | 25,774    |  
|                                                                                                                                                                 |  |                   |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                |  |                   | 1,232,018 |   |                  |   | 1,191,454 |  
|                                                                                                                                                                 |  |                  
|Shareholders equity                                                                                                                                             |  |                   |           |   |                  |   |           |  
|Preferred stock (par value $25.00) 1,000,000 shares authorized, none issued.                                                                                     |  |                   |          |   |                  |   |          |  
|Common stock (par value $1.00) 10,000,000 shares authorized, 4,904,672 and 4,889,297 shares issued; and 4,582,360 and 4,710,885 shares
outstanding, respectively |  |                   | 4,905     |   |                  |   | 4,889     |  
|Surplus                                                                                                                                                          |  |                   | 41,178    |   |                  |   | 38,847    |  
|Undivided profits                                                                                                                                                |  |                   | 79,946    |   |                  |   | 75,844    |  
|Accumulated other comprehensive (loss) income                                                                                                                    |  |                   | (130      | ) |                  |   | 1,205     |  
|Directors stock-based deferred compensation plan: 83,053 shares                                                                                                 |  |                   | (2,041    | ) |                  |   |          |  
|Treasury stock, at cost: 322,312 and 178,412 shares, respectively                                                                                                |  |                   | (8,656    | ) |                  |   | (5,225    | )
|                                                                                                                                                                 |  |                   |           |   |                  |   |           |  
|Total shareholders equity                                                                                                                                       |  |                   | 115,202   |   |                  |   | 115,560   |  
|                                                                                                                                                                 |  |                   |           |   |                  |   |           |  
|Total liabilities & shareholders equity                                                                                                                         |  | $                 | 1,347,220 |   |                  | $ | 1,307,014 |  
|                                                                                                                                                                 |  |                   |           |   |                  |   |           |  

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 Income (Unaudited)





|                                                                           |  |                                               |        |                                |   |        |  |      |        |  |   |       
|-------------------------------------------------------------------------- |  | --------------------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                                                           |  | Three months endedSeptember 30,               |        | Nine months endedSeptember 30,
|                                                                           |  | 2008                                          |        | 2007                           |   | 2008   |  | 2007
|                                                                           |  | (Dollars in thousands, except per share data)
|Interest income:                                                           |  |                                               |        |                                |   |        |  |      |        |  |   |       
|Interest and fees on loans and leases                                      |  | $                                             | 13,585 |                                | $ | 15,057 |  | $    | 41,421 |  | $ | 44,280
|Federal funds sold and interest bearing deposits                           |  |                                               | 10     |                                |   | 7      |  |      | 99     |  |   | 16    
|Securities                                                                 |  |                                               | 3,139  |                                |   | 2,964  |  |      | 9,745  |  |   | 8,758 
|                                                                           |  |                                               |        |                                |   |        |  |      |        |  |   |       
|Total interest income                                                      |  |                                               | 16,734 |                                |   | 18,028 |  |      | 51,265 |  |   | 53,054
|                                                                           |  |                                               |        |                               
|Interest expense:                                                          |  |                                               |        |                                |   |        |  |      |        |  |   |       
|Deposits:                                                                  |  |                                               |        |                                |   |        |  |      |        |  |   |       
|Savings accounts                                                           |  |                                               | 124    |                                |   | 115    |  |      | 361    |  |   | 349   
|Money market accounts                                                      |  |                                               | 1,099  |                                |   | 1,533  |  |      | 3,615  |  |   | 4,673 
|Time accounts                                                              |  |                                               | 3,480  |                                |   | 5,355  |  |      | 12,030 |  |   | 15,343
|NOW accounts                                                               |  |                                               | 177    |                                |   | 252    |  |      | 564    |  |   | 665   
|                                                                           |  |                                               |        |                                |   |        |  |      |        |  |   |       
|Total deposits                                                             |  |                                               | 4,880  |                                |   | 7,255  |  |      | 16,570 |  |   | 21,030
|Borrowings:                                                                |  |                                               |        |                                |   |        |  |      |        |  |   |       
|Repurchase agreements                                                      |  |                                               | 252    |                                |   | 741    |  |      | 752    |  |   | 2,238 
|FHLB advances                                                              |  |                                               | 1,698  |                                |   | 1,331  |  |      | 5,024  |  |   | 3,985 
|Junior subordinated obligations issued to unconsolidated subsidiary trusts |  |                                               | 325    |                                |   | 495    |  |      | 1,066  |  |   | 1,465 
|                                                                           |  |                                               |        |                                |   |        |  |      |        |  |   |       
|Total interest expense                                                     |  |                                               | 7,155  |                                |   | 9,822  |  |      | 23,412 |  |   | 28,718
|                                                                           |  |                                               |        |                               
|Net interest income                                                        |  |                                               | 9,579  |                                |   | 8,206  |  |      | 27,853 |  |   | 24,336
|Provision for credit losses                                                |  |                                               | 849    |                                |   | 1,140  |  |      | 3,526  |  |   | 2,590 
|                                                                           |  |                                               |        |                                |   |        |  |      |        |  |   |       
|Net interest income after provision for credit losses                      |  |                                               | 8,730  |                                |   | 7,066  |  |      | 24,327 |  |   | 21,746
|                                                                           |  |                                               |        |                               
|Non-interest income:                                                       |  |                                               |        |                                |   |        |  |      |        |  |   |       
|Investment management income                                               |  |                                               | 2,179  |                                |   | 2,335  |  |      | 6,717  |  |   | 6,834 
|Service charges on deposit accounts                                        |  |                                               | 1,379  |                                |   | 1,382  |  |      | 3,869  |  |   | 3,924 
|Card-related fees                                                          |  |                                               | 533    |                                |   | 486    |  |      | 1,578  |  |   | 1,421 
|Insurance agency income                                                    |  |                                               | 384    |                                |   | 479    |  |      | 1,204  |  |   | 1,335 
|Income from bank-owned life insurance                                      |  |                                               | 243    |                                |   | 160    |  |      | 606    |  |   | 473   
|Gain on the sale of loans                                                  |  |                                               | 55     |                                |   | 46     |  |      | 217    |  |   | 129   
|Gain on sale of securities available-for-sale                              |  |                                               |       |                                |   |       |  |      | 137    |  |   |      
|Other non-interest income                                                  |  |                                               | 361    |                                |   | 544    |  |      | 1,278  |  |   | 1,471 
|                                                                           |  |                                               |        |                                |   |        |  |      |        |  |   |       
|Total non-interest income                                                  |  |                                               | 5,134  |                                |   | 5,432  |  |      | 15,606 |  |   | 15,587
|                                                                           |  |                                               |        |                               
|Non-interest expense:                                                      |  |                                               |        |                                |   |        |  |      |        |  |   |       
|Salaries and employee benefits                                             |  |                                               | 5,108  |                                |   | 4,634  |  |      | 15,025 |  |   | 13,631
|Occupancy and equipment expense                                            |  |                                               | 1,751  |                                |   | 1,560  |  |      | 5,148  |  |   | 5,087 
|Communication expense                                                      |  |                                               | 200    |                                |   | 174    |  |      | 602    |  |   | 583   
|Office supplies and postage expense                                        |  |                                               | 310    |                                |   | 325    |  |      | 861    |  |   | 908   
|Marketing expense                                                          |  |                                               | 278    |                                |   | 296    |  |      | 847    |  |   | 1,012 
|Amortization of intangible assets                                          |  |                                               | 411    |                                |   | 435    |  |      | 1,234  |  |   | 1,319 
|Professional fees                                                          |  |                                               | 602    |                                |   | 670    |  |      | 1,964  |  |   | 2,097 
|Other non-interest expense                                                 |  |                                               | 1,239  |                                |   | 1,256  |  |      | 3,642  |  |   | 3,505 
|                                                                           |  |                                               |        |                                |   |        |  |      |        |  |   |       
|Total non-interest expense                                                 |  |                                               | 9,899  |                                |   | 9,350  |  |      | 29,323 |  |   | 28,142
|                                                                           |  |                                               |        |                               
|Income before income tax expense                                           |  |                                               | 3,965  |                                |   | 3,148  |  |      | 10,610 |  |   | 9,191 
|Income tax expense                                                         |  |                                               | 955    |                                |   | 738    |  |      | 2,637  |  |   | 2,154 
|                                                                           |  |                                               |        |                                |   |        |  |      |        |  |   |       
|Net income                                                                 |  | $                                             | 3,010  |                                | $ | 2,410  |  | $    | 7,973  |  | $ | 7,037 
|                                                                           |  |                                               |        |                                |   |        |  |      |        |  |   |       
|Net income per common share                                                |  |                                               |        |                                |   |        |  |      |        |  |   |       
|Basic earnings per share                                                   |  | $                                             | 0.66   |                                | $ | 0.51   |  | $    | 1.75   |  | $ | 1.49  
|Diluted earnings per share                                                 |  | $                                             | 0.65   |                                | $ | 0.51   |  | $    | 1.73   |  | $ | 1.47  
|Cash dividends declared per share                                          |  | $                                             | 0.26   |                                | $ | 0.22   |  | $    | 0.74   |  | $ | 0.66  

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)



(Dollars in thousands)



|                                                                                                         |  |                                   |   |  |             |       |   |         |   |        |                  |  |   |                                            |   |  |                                      |        |   |               |   |        |       |  |   |        |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | --------------------------------- | - |  | ----------- | ----- | - | ------- | - | ------ | ---------------- |  | - | ------------------------------------------ | - |  | ------------------------------------ | ------ | - | ------------- | - | ------ | ----- |  | - | ------ | - |  | - | ------- | -
|                                                                                                         |  | Issued andOutstandingCommonShares |   |  | CommonStock |       |   | Surplus |   |        | UndividedProfits |  |   | AccumulatedOtherComprehensive(Loss)/Income |   |  | DirectorsStock-basedCompensationPlan |        |   | TreasuryStock |   |        | Total | 
|Balance at December 31, 2006                                                                             |  | 4,800,512                         |   |  | $           | 4,895 |   |         | $ | 38,986 |                  |  | $ | 70,658                                     |   |  | $                                    | (2,122 | ) |               | $ |       |       |  | $ | (2,911 | ) |  | $ | 109,506 |  
|Comprehensive income                                                                                     |  |                                   |   |  |             |       |   |         |   |        |                  |  |   |                                            |   |  |                                      |        |   |               |   |        |       |  |   |        |   |  |   |         |  
|Net income                                                                                               |  |                                  |   |  |             |      |   |         |   |       |                  |  |   | 7,037                                      |   |  |                                      |       |   |               |   |       |       |  |   |       |   |  |   | 7,037   |  
|Other comprehensive income, net of taxes:                                                                |  |                                   |   |  |             |       |   |         |   |        |                  |  |   |                                            |   |  |                                      |        |   |               |   |        |       |  |   |        |   |  |   |         |  
|Change in unrealized loss in available-for-sale securities, net of reclassification adjustment           |  |                                  |   |  |             |      |   |         |   |       |                  |  |   |                                           |   |  |                                      | 432    |   |               |   |       |       |  |   |       |   |  |   | 432     |  
|Change in accumulated unrealized losses and prior service costs for pension and post-retirement benefits |  |                                  |   |  |             |      |   |         |   |       |                  |  |   |                                           |   |  |                                      | 183    |   |               |   |       |       |  |   |       |   |  |   | 183     |  
|                                                                                                         |  |                                   |   |  |             |       |   |         |   |        |                  |  |   |                                            |   |  |                                      |        |   |               |   |        |       |  |   |        |   |  |   |         |  
|Comprehensive income                                                                                     |  |                                  |   |  |             |      |   |         |   |       |                  |  |   | 7,037                                      |   |  |                                      | 615    |   |               |   |       |       |  |   |       |   |  |   | 7,652   |  
|Issuance of restricted stock                                                                             |  | 16,950                            |   |  |             | 17    |   |         |   | (17    | )                |  |   |                                           |   |  |                                      |       |   |               |   |       |       |  |   |       |   |  |   |        |  
|Forfeiture of restricted stock                                                                           |  | (10,150                           | ) |  |             | (10   | ) |         |   | (80    | )                |  |   |                                           |   |  |                                      |       |   |               |   |       |       |  |   |       |   |  |   | (90     | )
|Amortization of restricted stock                                                                         |  |                                  |   |  |             |      |   |         |   | 248    |                  |  |   |                                           |   |  |                                      |       |   |               |   |       |       |  |   |       |   |  |   | 248     |  
|Tax benefit of restricted stock plan                                                                     |  |                                  |   |  |             |      |   |         |   | 19     |                  |  |   |                                           |   |  |                                      |       |   |               |   |       |       |  |   |       |   |  |   | 19      |  
|Stock options exercised                                                                                  |  | 8,027                             |   |  |             | 8     |   |         |   | 170    |                  |  |   |                                           |   |  |                                      |       |   |               |   |       |       |  |   |       |   |  |   | 178     |  
|Tax benefit of stock-based compensation                                                                  |  |                                  |   |  |             |      |   |         |   | 60     |                  |  |   |                                           |   |  |                                      |       |   |               |   |       |       |  |   |       |   |  |   | 60      |  
|Cash dividend, $.66 per share                                                                            |  |                                  |   |  |             |      |   |         |   |       |                  |  |   | (3,156                                     | ) |  |                                      |       |   |               |   |       |       |  |   |       |   |  |   | (3,156  | )
|Treasury stock purchased                                                                                 |  | (31,830                           | ) |  |             |      |   |         |   |       |                  |  |   |                                           |   |  |                                      |       |   |               |   |       |       |  |   | (982   | ) |  |   | (982    | )
|                                                                                                         |  |                                   |   |  |             |       |   |         |   |        |                  |  |   |                                            |   |  |                                      |        |   |               |   |        |       |  |   |        |   |  |   |         |  
|Balance at September 30, 2007                                                                            |  | 4,783,509                         |   |  | $           | 4,910 |   |         | $ | 39,386 |                  |  | $ | 74,539                                     |   |  | $                                    | (1,507 | ) |               | $ |       |       |  | $ | (3,893 | ) |  | $ | 113,435 |  
|                                                                                                         |  |                                   |   |  |             |       |   |         |   |        |                  |  |   |                                            |   |  |                                      |        |   |               |   |        |       |  |   |        |   |  |   |         |  
|Balance at December 31, 2007                                                                             |  | 4,710,885                         |   |  | $           | 4,889 |   |         | $ | 38,847 |                  |  | $ | 75,844                                     |   |  | $                                    | 1,205  |   |               | $ |       |       |  | $ | (5,225 | ) |  | $ | 115,560 |  
|Comprehensive income                                                                                     |  |                                   |   |  |             |       |   |         |   |        |                  |  |   |                                            |   |  |                                      |        |   |               |   |        |       |  |   |        |   |  |   |         |  
|Net income                                                                                               |  |                                  |   |  |             |      |   |         |   |       |                  |  |   | 7,973                                      |   |  |                                      |       |   |               |   |       |       |  |   |       |   |  |   | 7,973   |  
|Other comprehensive income, net of taxes:                                                                |  |                                   |   |  |             |       |   |         |   |        |                  |  |   |                                            |   |  |                                      |        |   |               |   |        |       |  |   |        |   |  |   |         |  
|Change in unrealized gain in available-for-sale securities (net of tax)                                  |  |                                  |   |  |             |      |   |         |   |       |                  |  |   |                                           |   |  |                                      | (1,331 | ) |               |   |       |       |  |   |       |   |  |   | (1,331  | )
|Change in accumulated unrealized losses and prior service costs for pension and post-retirement benefits |  |                                  |   |  |             |      |   |         |   |       |                  |  |   |                                           |   |  |                                      | (4     | ) |               |   |       |       |  |   |       |   |  |   | (4      | )
|                                                                                                         |  |                                   |   |  |             |       |   |         |   |        |                  |  |   |                                            |   |  |                                      |        |   |               |   |        |       |  |   |        |   |  |   |         |  
|Comprehensive income                                                                                     |  |                                  |   |  |             |      |   |         |   |       |                  |  |   | 7,973                                      |   |  |                                      | (1,335 | ) |               |   |       |       |  |   |       |   |  |   | 6,638   |  
|Cumulative effect of change in pension measurement date                                                  |  |                                  |   |  |             |      |   |         |   |       |                  |  |   | 27                                         |   |  |                                      |       |   |               |   |       |       |  |   |       |   |  |   | 27      |  
|Cumulative effect of change in accounting for adoption of EITF 06-4                                      |  |                                  |   |  |             |      |   |         |   |       |                  |  |   | (462                                       | ) |  |                                      |       |   |               |   |       |       |  |   |       |   |  |   | (462    | )
|Issuance of restricted stock                                                                             |  | 15,500                            |   |  |             | 16    |   |         |   | (16    | )                |  |   |                                           |   |  |                                      |       |   |               |   |       |       |  |   |       |   |  |   |        |  
|Forfeiture of restricted stock                                                                           |  | (125                              | ) |  |             |      |   |         |   | (2     | )                |  |   |                                           |   |  |                                      |       |   |               |   |       |       |  |   |       |   |  |   | (2      | )
|Amortization of restricted stock                                                                         |  |                                  |   |  |             |      |   |         |   | 280    |                  |  |   |                                           |   |  |                                      |       |   |               |   |       |       |  |   |       |   |  |   | 280     |  
|Tax benefit of restricted stock plan                                                                     |  |                                  |   |  |             |      |   |         |   | 26     |                  |  |   |                                           |   |  |                                      |       |   |               |   |       |       |  |   |       |   |  |   | 26      |  
|Tax benefit of stock-based compensation                                                                  |  |                                  |   |  |             |      |   |         |   | 2      |                  |  |   |                                           |   |  |                                      |       |   |               |   |       |       |  |   |       |   |  |   | 2       |  
|Cash dividend, $0.74 per share                                                                           |  |                                  |   |  |             |      |   |         |   |       |                  |  |   | (3,436                                     | ) |  |                                      |       |   |               |   |       |       |  |   |       |   |  |   | (3,436  | )
|Directors deferred stock plan stock purchases                                                           |  |                                  |   |  |             |      |   |         |   | 2,041  |                  |  |   |                                           |   |  |                                      |       |   |               |   | (2,041 | )     |  |   |       |   |  |   |        |  
|Treasury stock purchased                                                                                 |  | (143,900                          | ) |  |             |      |   |         |   |       |                  |  |   |                                           |   |  |                                      |       |   |               |   |       |       |  |   | (3,431 | ) |  |   | (3,431  | )
|                                                                                                         |  |                                   |   |  |             |       |   |         |   |        |                  |  |   |                                            |   |  |                                      |        |   |               |   |        |       |  |   |        |   |  |   |         |  
|Balance at September 30, 2008                                                                            |  | 4,582,360                         |   |  | $           | 4,905 |   |         | $ | 41,178 |                  |  | $ | 79,946                                     |   |  | $                                    | (130   | ) |               | $ | (2,041 | )     |  | $ | (8,656 | ) |  | $ | 115,202 |  
|                                                                                                         |  |                                   |   |  |             |       |   |         |   |        |                  |  |   |                                            |   |  |                                      |        |   |               |   |        |       |  |   |        |   |  |   |         |  

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)





|                                                                                                                  |  |                                |         |   |      |   |         |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                                                  |  | Nine months endedSeptember 30, |        
|                                                                                                                  |  | 2008                           |         |   | 2007 |  
|Operating Activities:                                                                                             |  |                                |         |   |      |   |         |  
|Net Income                                                                                                        |  | $                              | 7,973   |   |      | $ | 7,037   |  
|                                                                                                                  |  |                               
|Adjustments to reconcile net income to net cash provided by operating activities:                                 |  |                                |         |   |      |   |         |  
|Provision for credit losses                                                                                       |  |                                | 3,526   |   |      |   | 2,590   |  
|Depreciation expense                                                                                              |  |                                | 1,892   |   |      |   | 1,884   |  
|Increase in surrender value of life insurance                                                                     |  |                                | (606    | ) |      |   | (473    | )
|Provision (benefit) for deferred income taxes                                                                     |  |                                | 704     |   |      |   | (85     | )
|Amortization (accretion) of investment security discounts and premiums, net                                       |  |                                | 185     |   |      |   | (211    | )
|Net gain on sale of securities available-for-sale                                                                 |  |                                | (137    | ) |      |   |        |  
|Net loss on sale of premises and equipment                                                                        |  |                                | 2       |   |      |   | 13      |  
|Proceeds from the sale of loans and leases held-for-sale                                                          |  |                                | 23,514  |   |      |   | 8,449   |  
|Origination of loans held-for-sale                                                                                |  |                                | (9,606  | ) |      |   | (8,320  | )
|Gain on sale of loans held-for-sale                                                                               |  |                                | (86     | ) |      |   | (129    | )
|Write-down of leases transferred to held-for-sale                                                                 |  |                                | 160     |   |      |   |        |  
|Gain on sale of assets held-for-sale                                                                              |  |                                | (99     | ) |      |   |        |  
|Gain on foreclosed real estate                                                                                    |  |                                | (30     | ) |      |   |        |  
|Amortization of capitalized servicing rights                                                                      |  |                                | 207     |   |      |   | 221     |  
|Amortization of intangible assets                                                                                 |  |                                | 1,234   |   |      |   | 1,319   |  
|Restricted stock expense                                                                                          |  |                                | 280     |   |      |   | 158     |  
|Change in other assets and liabilities                                                                            |  |                                | (97     | ) |      |   | (421    | )
|                                                                                                                  |  |                                |         |   |      |   |         |  
|Net cash provided by operating activities                                                                         |  |                                | 29,016  |   |      |   | 12,032  |  
|                                                                                                                  |  |                               
|Investing Activities:                                                                                             |  |                                |         |   |      |   |         |  
|Proceeds from maturities, redemptions, calls and principal repayments of investment securities available-for-sale |  |                                | 71,731  |   |      |   | 56,407  |  
|Proceeds from sales of investment securities available-for-sale                                                   |  |                                | 6,299   |   |      |   |        |  
|Purchase of investment securities available-for-sale                                                              |  |                                | (97,739 | ) |      |   | (69,156 | )
|Purchase of FHLB and FRB stock                                                                                    |  |                                | (16,696 | ) |      |   | (20,471 | )
|Redemption of FHLB stock                                                                                          |  |                                | 14,130  |   |      |   | 19,228  |  
|Net increase in loans and leases                                                                                  |  |                                | (34,969 | ) |      |   | (10,868 | )
|Purchases of premises and equipment                                                                               |  |                                | (1,062  | ) |      |   | (1,228  | )
|Proceeds from the sale of premises and equipment                                                                  |  |                                | 25      |   |      |   | 640     |  
|Proceeds from disposition of foreclosed assets                                                                    |  |                                | 395     |   |      |   |        |  
|Proceeds from assets held-for-sale                                                                                |  |                                | 176     |   |      |   | 107     |  
|Purchase of bank-owned life insurance                                                                             |  |                                | (7,000  | ) |      |   |        |  
|                                                                                                                  |  |                                |         |   |      |   |         |  
|Net cash used in investing activities                                                                             |  |                                | (64,710 | ) |      |   | (25,341 | )
|                                                                                                                  |  |                               
|Financing Activities:                                                                                             |  |                                |         |   |      |   |         |  
|Net increase in demand deposits, NOW and savings accounts                                                         |  |                                | 51,242  |   |      |   | 8,179   |  
|Net (decrease) increase in time deposits                                                                          |  |                                | (51,063 | ) |      |   | 293     |  
|Net increase in short-term borrowings                                                                             |  |                                | 7,204   |   |      |   | 5,185   |  
|Proceeds from long-term borrowings                                                                                |  |                                | 50,000  |   |      |   | 20,000  |  
|Payments on long-term borrowings                                                                                  |  |                                | (15,000 | ) |      |   | (15,700 | )
|Proceeds from the exercise of stock options                                                                       |  |                                |        |   |      |   | 178     |  
|Treasury stock purchased                                                                                          |  |                                | (3,431  | ) |      |   | (982    | )
|Tax benefit of stock-based compensation                                                                           |  |                                | 26      |   |      |   | 79      |  
|Purchase of shares for directors deferred stock-based plan                                                       |  |                                | (2,041  | ) |      |   |        |  
|Cash dividends                                                                                                    |  |                                | (3,366  | ) |      |   | (3,161  | )
|                                                                                                                  |  |                                |         |   |      |   |         |  
|Net cash provided by financing activities                                                                         |  |                                | 33,571  |   |      |   | 14,071  |  
|                                                                                                                  |  |                                |         |   |      |   |         |  
|Net (decrease) increase in cash and cash equivalents                                                              |  |                                | (2,123  | ) |      |   | 762     |  
|Cash and cash equivalents at beginning of period                                                                  |  |                                | 30,704  |   |      |   | 27,398  |  
|                                                                                                                  |  |                                |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                                        |  | $                              | 28,581  |   |      | $ | 28,160  |  
|                                                                                                                  |  |                                |         |   |      |   |         |  
|Supplemental Disclosures of Cash Flow Information:                                                                |  |                                |         |   |      |   |         |  
|Interest received during the period                                                                               |  | $                              | 50,692  |   |      | $ | 51,823  |  
|Interest paid during the period                                                                                   |  |                                | 24,471  |   |      |   | 27,929  |  
|Income taxes                                                                                                      |  |                                | 921     |   |      |   | 1,056   |  
|Non-cash investing activities:                                                                                    |  |                                |         |   |      |   |         |  
|Change in unrealized gain/loss on available-for-sale securities                                                   |  |                                | (2,126  | ) |      |   | 741     |  
|Transfer of leases to held-for-sale                                                                               |  |                                | 10,819  |   |      |   |        |  
|Transfer of premises and equipment to assets held-for-sale                                                        |  |                                |        |   |      |   | 606     |  
|Transfer of loans to other real estate and repossessed assets                                                     |  |                                | 576     |   |      |   | 310     |  
|Non-cash financing activities:                                                                                    |  |                                |         |   |      |   |         |  
|Dividend declared and unpaid                                                                                      |  |                                | 1,205   |   |      |   | 1,052   |  

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





|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 generally accepted accounting principles. The following material under the heading Managements Discussion and Analysis of Financial Condition and Results of Operations is
written with the presumption that the users of the interim financial statements have read, or have access to, the latest audited financial statements and notes thereto of the Company, together with Managements Discussion and Analysis of
Financial Condition and Results of Operations as of December 31, 2007 and for the three-year period then ended, included in the Companys Annual Report on Form 10-K for the year ended December 31, 2007. Accordingly, only material
changes in the results of operations and financial condition are discussed in the remainder of Part I. Certain amounts from prior year periods are reclassified, when necessary, to conform to the current period presentation.

All adjustments that in the opinion of management are necessary for a fair presentation of the financial statements have been included in the results of operations for
the three and nine months ended September 30, 2008 and 2007.

Critical Accounting Estimates and Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 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.

Securities

The Company classifies securities as held-to-maturity or available-for-sale at the time of purchase. Held-to-maturity securities are those that the Company 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 the Company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. Where there is other than temporary impairment, the impairment loss is recognized in the consolidated statements
of income. Purchases and sales of securities are recognized on a trade-date basis.

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 collectibility 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



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Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements





finance income at level rates of return over the term of the leases. The recorded residual values of the Company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. On a quarterly basis, the Company reassesses the realizable value of its lease residual values. 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 the Company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. The Company 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 Company establishes a
specific allocation for all loans and leases classified as being impaired in excess of $250,000, which have been risk rated under the Companys risk rating system as substandard, doubtful, or loss. For all other commercial loans and leases, the
Company 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 the
Companys loan and lease portfolio.

A loan or lease is considered impaired, based on current information and events, if it is probable that the
Company 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.

Loans
are charged off when they are considered a loss regardless of the delinquency status. From a delinquency standpoint, the policy of the Company 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.



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

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



|                                                      |  |                    |         |                      |   |                       |  |                     |       |  |   |        
|----------------------------------------------------- |  | ------------------ | ------- | -------------------- | - | --------------------- |  | ------------------- | ----- |  | - | -------
|                                                      |  | September 30, 2008
|                                                      |  | AmortizedCost      |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | EstimatedFair Value
|Debt Securities:                                      |  |                    |         |                      |   |                       |  |                     |       |  |   |        
|U.S. Treasury obligations                             |  | $                  | 100     |                      | $ | 1                     |  | $                   |      |  | $ | 101    
|Obligations of U.S. government-sponsored corporations |  |                    | 38,094  |                      |   | 115                   |  |                     | 72    |  |   | 38,137 
|Obligations of states and political subdivisions      |  |                    | 90,353  |                      |   | 968                   |  |                     | 1,201 |  |   | 90,120 
|Mortgage-backed securities                            |  |                    | 159,378 |                      |   | 725                   |  |                     | 1,156 |  |   | 158,947
|                                                      |  |                    |         |                      |   |                       |  |                     |       |  |   |        
|Total debt securities                                 |  |                    | 287,925 |                      |   | 1,809                 |  |                     | 2,429 |  |   | 287,305
|Stock Investments:                                    |  |                    |         |                      |   |                       |  |                     |       |  |   |        
|Equity securities                                     |  |                    | 1,958   |                      |   |                      |  |                     | 2     |  |   | 1,956  
|Mutual Funds                                          |  |                    | 1,000   |                      |   | 14                    |  |                     | 27    |  |   | 987    
|                                                      |  |                    |         |                      |   |                       |  |                     |       |  |   |        
|Total stock investments                               |  |                    | 2,958   |                      |   | 14                    |  |                     | 29    |  |   | 2,943  
|                                                      |  |                    |         |                      |   |                       |  |                     |       |  |   |        
|Total available-for-sale                              |  | $                  | 290,883 |                      | $ | 1,823                 |  | $                   | 2,458 |  | $ | 290,248
|                                                      |  |                    |         |                      |   |                       |  |                     |       |  |   |        



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Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements





|                                                      |  |                   |         |                      |   |                       |  |                     |       |  |   |        
|----------------------------------------------------- |  | ----------------- | ------- | -------------------- | - | --------------------- |  | ------------------- | ----- |  | - | -------
|                                                      |  | December 31, 2007
|                                                      |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | EstimatedFair Value
|Debt Securities:                                      |  |                   |         |                      |   |                       |  |                     |       |  |   |        
|U.S. Treasury obligations                             |  | $                 | 100     |                      | $ | 1                     |  | $                   |      |  | $ | 101    
|Obligations of U.S. government-sponsored corporations |  |                   | 60,902  |                      |   | 162                   |  |                     | 122   |  |   | 60,942 
|Obligations of states and political subdivisions      |  |                   | 87,028  |                      |   | 1,657                 |  |                     | 105   |  |   | 88,580 
|Mortgage-backed securities                            |  |                   | 120,258 |                      |   | 675                   |  |                     | 778   |  |   | 120,155
|                                                      |  |                   |         |                      |   |                       |  |                     |       |  |   |        
|Total debt securities                                 |  |                   | 268,288 |                      |   | 2,495                 |  |                     | 1,005 |  |   | 269,778
|Stock Investments:                                    |  |                   |         |                      |   |                       |  |                     |       |  |   |        
|Equity securities                                     |  |                   | 1,934   |                      |   | 12                    |  |                     |      |  |   | 1,946  
|Mutual Funds                                          |  |                   | 1,000   |                      |   | 15                    |  |                     | 26    |  |   | 989    
|                                                      |  |                   |         |                      |   |                       |  |                     |       |  |   |        
|Total stock investments                               |  |                   | 2,934   |                      |   | 27                    |  |                     | 26    |  |   | 2,935  
|                                                      |  |                   |         |                      |   |                       |  |                     |       |  |   |        
|Total available-for-sale                              |  | $                 | 271,222 |                      | $ | 2,522                 |  | $                   | 1,031 |  | $ | 272,713
|                                                      |  |                   |         |                      |   |                       |  |                     |       |  |   |        

As of September 30, 2008 and December 31, 2007, mortgage-backed securities were 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 supported by the full faith and credit of the United States government.

For the periods ending September 30, 2008 and December 31, 2007, securities with a carrying value of $270.0 million and $262.3 million, respectively, were
pledged as collateral for certain deposits and other purposes as required or permitted by law.

The following table shows the securities with unrealized
losses for the periods indicated, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at the dates indicated (in thousands):



|                                                      |  |                     |         |                     |   |                     |  |                  |       |                     |   |                  |  |   |         |  |   |      
|----------------------------------------------------- |  | ------------------- | ------- | ------------------- | - | ------------------- |  | ---------------- | ----- | ------------------- | - | ---------------- |  | - | ------- |  | - | -----
|                                                      |  | September 30, 2008 
|                                                      |  | Less than 12 Months |         | 12 Months or Longer |   | Total              
|Type of Security                                      |  | EstimatedFair Value |         | UnrealizedLosses    |   | EstimatedFair Value |  | UnrealizedLosses |       | EstimatedFair Value |   | UnrealizedLosses
|Obligations of U.S. government-sponsored corporations |  | $                   | 22,073  |                     | $ | 72                  |  | $                |      |                     | $ |                 |  | $ | 22,073  |  | $ | 72   
|Obligations of states and political subdivisions      |  |                     | 30,144  |                     |   | 1,201               |  |                  |      |                     |   |                 |  |   | 30,144  |  |   | 1,201
|Mortgage-backed securities                            |  |                     | 84,351  |                     |   | 893                 |  |                  | 7,092 |                     |   | 263              |  |   | 91,443  |  |   | 1,156
|                                                      |  |                     |         |                     |   |                     |  |                  |       |                     |   |                  |  |   |         |  |   |      
|Subtotal, debt securities                             |  |                     | 136,568 |                     |   | 2,166               |  |                  | 7,092 |                     |   | 263              |  |   | 143,660 |  |   | 2,429
|Equity securities                                     |  |                     | 21      |                     |   | 2                   |  |                  |      |                     |   |                 |  |   | 21      |  |   | 2    
|Mutual Funds                                          |  |                     |        |                     |   |                    |  |                  | 473   |                     |   | 27               |  |   | 473     |  |   | 27   
|                                                      |  |                     |         |                     |   |                     |  |                  |       |                     |   |                  |  |   |         |  |   |      
|Total temporarily impaired securities                 |  | $                   | 136,589 |                     | $ | 2,168               |  | $                | 7,565 |                     | $ | 290              |  | $ | 144,154 |  | $ | 2,458
|                                                      |  |                     |         |                     |   |                     |  |                  |       |                     |   |                  |  |   |         |  |   |      



|                                                      |  |                     |        |                     |   |                     |  |                  |        |                     |   |                  |  |   |         |  |   |      
|----------------------------------------------------- |  | ------------------- | ------ | ------------------- | - | ------------------- |  | ---------------- | ------ | ------------------- | - | ---------------- |  | - | ------- |  | - | -----
|                                                      |  | December 31, 2007  
|                                                      |  | Less than 12 Months |        | 12 Months or Longer |   | Total              
|Type of Security                                      |  | EstimatedFair Value |        | UnrealizedLosses    |   | EstimatedFair Value |  | UnrealizedLosses |        | EstimatedFair Value |   | UnrealizedLosses
|Obligations of U.S. government-sponsored corporations |  | $                   | 7,063  |                     | $ | 4                   |  | $                | 24,332 |                     | $ | 118              |  | $ | 31,395  |  | $ | 122  
|Obligations of states and political subdivisions      |  |                     | 2,147  |                     |   | 33                  |  |                  | 10,387 |                     |   | 72               |  |   | 12,534  |  |   | 105  
|Mortgage-backed securities                            |  |                     | 8,436  |                     |   | 56                  |  |                  | 49,589 |                     |   | 722              |  |   | 58,025  |  |   | 778  
|                                                      |  |                     |        |                     |   |                     |  |                  |        |                     |   |                  |  |   |         |  |   |      
|Subtotal, debt securities                             |  |                     | 17,646 |                     |   | 93                  |  |                  | 84,308 |                     |   | 912              |  |   | 101,954 |  |   | 1,005
|Mutual Funds                                          |  |                     |       |                     |   |                    |  |                  | 474    |                     |   | 26               |  |   | 474     |  |   | 26   
|                                                      |  |                     |        |                     |   |                     |  |                  |        |                     |   |                  |  |   |         |  |   |      
|Total temporarily impaired securities                 |  | $                   | 17,646 |                     | $ | 93                  |  | $                | 84,782 |                     | $ | 938              |  | $ | 102,428 |  | $ | 1,031
|                                                      |  |                     |        |                     |   |                     |  |                  |        |                     |   |                  |  |   |         |  |   |      



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##### Table of Contents

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements





Management does not believe any individual unrealized loss as of September 30, 2008 represents an
other-than-temporary impairment. A total of 216 available-for-sale securities were in a continuous unrealized loss position for less than 12 months and 13 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. The Company has both the intent and ability to hold the securities contained in the previous table for a time necessary to recover
the amortized cost.



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

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



|                            |  |                   |         |   |                  |   |         |  
|--------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                            |  | September 30,2008 |         |   | December 31,2007 |  
|Residential real estate     |  | $                 | 305,302 |   |                  | $ | 273,465 |  
|Commercial loans            |  |                   | 215,527 |   |                  |   | 217,136 |  
|Leases                      |  |                   | 129,765 |   |                  |   | 150,933 |  
|Indirect auto loans         |  |                   | 185,377 |   |                  |   | 176,115 |  
|Other consumer loans        |  |                   | 90,877  |   |                  |   | 94,246  |  
|                            |  |                   |         |   |                  |   |         |  
|Total                       |  |                   | 926,848 |   |                  |   | 911,895 |  
|                            |  |                  
|Less: Unearned income       |  |                   | (14,758 | ) |                  |   | (19,633 | )
|Net deferred loan costs     |  |                   | 3,940   |   |                  |   | 3,271   |  
|Allowance for credit losses |  |                   | (8,875  | ) |                  |   | (8,426  | )
|                            |  |                   |         |   |                  |   |         |  
|Net loans & leases          |  | $                 | 907,155 |   |                  | $ | 887,107 |  
|                            |  |                   |         |   |                  |   |         |  

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



|                                                     |  |                   |       |                  |   |      
|---------------------------------------------------- |  | ----------------- | ----- | ---------------- | - | -----
|                                                     |  | September 30,2008 |       | December 31,2007
|Loans and leases 90 days past due and still accruing |  | $                 | 217   |                  | $ | 39   
|Non-accrual loans and leases                         |  |                   | 4,507 |                  |   | 6,667
|                                                     |  |                   |       |                  |   |      
|Total nonperforming loans and leases                 |  | $                 | 4,724 |                  | $ | 6,706
|                                                     |  |                   |       |                  |   |      

As of September 30, 2008 impaired loans and leases totaled approximately $1.4 million. The related allowance
for credit losses allocated to impaired loans at September 30, 2008 was $193,000.

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:



|                                                      |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   |        |  
|----------------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                      |  | Three months endedSeptember 30, |       |   | Nine months endedSeptember 30, |  
|                                                      |  | 2008                            |       |   | 2007                           |   |       | 2008 |  |   | 2007   |  
|                                                      |  | (In thousands)                  |      
|Allowance for credit losses, beginning of period      |  | $                               | 8,651 |   |                                | $ | 7,538 |      |  | $ | 8,426  |   |  | $ | 7,029  |  
|                                                      |  |                                 |       |  
|Loans and leases charged-off                          |  |                                 | (805  | ) |                                |   | (924  | )    |  |   | (3,762 | ) |  |   | (2,377 | )
|Recoveries of loans and leases previously charged-off |  |                                 | 180   |   |                                |   | 109   |      |  |   | 685    |   |  |   | 621    |  
|                                                      |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Net loans and leases charged-off                      |  |                                 | (625  | ) |                                |   | (815  | )    |  |   | (3,077 | ) |  |   | (1,756 | )
|                                                      |  |                                 |       |  
|Provision for credit losses                           |  |                                 | 849   |   |                                |   | 1,140 |      |  |   | 3,526  |   |  |   | 2,590  |  
|                                                      |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Allowance for credit losses, end of period            |  | $                               | 8,875 |   |                                | $ | 7,863 |      |  | $ | 8,875  |   |  | $ | 7,863  |  
|                                                      |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   |        |  



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##### Table of Contents

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements





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

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



|                              |  |                   |         |                  |   |        
|----------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                              |  | September 30,2008 |         | December 31,2007
|Non-interest-bearing checking |  | $                 | 135,359 |                  | $ | 138,691
|Interest-bearing checking     |  |                   | 111,404 |                  |   | 101,793
|Savings accounts              |  |                   | 86,419  |                  |   | 82,326 
|Money market accounts         |  |                   | 243,944 |                  |   | 203,074
|Time deposits                 |  |                   | 368,283 |                  |   | 419,346
|                              |  |                   |         |                  |   |        
|Total deposits                |  | $                 | 945,409 |                  | $ | 945,230
|                              |  |                   |         |                  |   |        



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

Basic and diluted net income per common share
calculations are as follows:



|                                                                                 |  |                                                  |           |                                    |   |           |  |      |           |  |   |          
|-------------------------------------------------------------------------------- |  | ------------------------------------------------ | --------- | ---------------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                                                                                 |  | For three months endedSeptember 30,              |           | For nine months endedSeptember 30,
|                                                                                 |  | 2008                                             |           | 2007                               |   | 2008      |  | 2007
|                                                                                 |  | (Dollars in thousands, except per share amounts)
|Basic:                                                                           |  |                                                  |           |                                    |   |           |  |      |           |  |   |          
|Net Income                                                                       |  | $                                                | 3,010     |                                    | $ | 2,410     |  | $    | 7,973     |  | $ | 7,037    
|                                                                                 |  |                                                  |           |                                    |   |           |  |      |           |  |   |          
|Average common shares outstanding                                                |  |                                                  | 4,545,357 |                                    |   | 4,709,334 |  |      | 4,559,794 |  |   | 4,714,379
|Net income per common share  basic                                              |  | $                                                | 0.66      |                                    | $ | 0.51      |  | $    | 1.75      |  | $ | 1.49     
|                                                                                 |  |                                                  |           |                                    |   |           |  |      |           |  |   |          
|Diluted:                                                                         |  |                                                  |           |                                    |   |           |  |      |           |  |   |          
|Net income                                                                       |  | $                                                | 3,010     |                                    | $ | 2,410     |  | $    | 7,973     |  | $ | 7,037    
|                                                                                 |  |                                                  |           |                                    |   |           |  |      |           |  |   |          
|Average common shares outstanding                                                |  |                                                  | 4,545,357 |                                    |   | 4,709,334 |  |      | 4,559,794 |  |   | 4,714,379
|Incremental shares from assumed conversion of stock options and restricted stock |  |                                                  | 52,095    |                                    |   | 46,754    |  |      | 55,558    |  |   | 61,759   
|                                                                                 |  |                                                  |           |                                    |   |           |  |      |           |  |   |          
|Average common shares outstanding  diluted                                      |  |                                                  | 4,597,452 |                                    |   | 4,756,088 |  |      | 4,615,352 |  |   | 4,776,138
|Net income per common share  diluted                                            |  | $                                                | 0.65      |                                    | $ | 0.51      |  | $    | 1.73      |  | $ | 1.47     
|                                                                                 |  |                                                  |           |                                    |   |           |  |      |           |  |   |          

Basic earnings per share are computed by dividing net income by the weighted average number of common shares
outstanding during each period. Diluted earnings per share give the effect to weighted average shares which would be outstanding assuming the exercise of options and vesting of restricted stock using the treasury stock method. For the three and nine
months ended September 30, 2008, 109,917 and 66,638, respectively, anti-dilutive stock options were excluded from the diluted weighted average common share calculations.



|6. | Retirement Plan and Post-Retirement Benefits
|-- | --------------------------------------------

The Company has a
noncontributory defined benefit 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. The Company does not expect to make contributions to its pension plan in 2008.

Prior to September 30, 2007, post-retirement medical and
life insurance benefits were available to full-time employees who had worked 15 years and attained age 55. Subsequent to the acquisition of Bridge Street, benefits for the Bridge Street active participants were converted to those under the
Companys plan. Retirees and certain active employees with more than 20 years of service to the Company continue to receive benefits in accordance with plans that existed at First National Bank of Cortland and Oneida Valley National Bank, prior
to the merger of the banks in 1998. At September 30, 2007, the Company settled (the Settlement) the post-retirement benefits for certain active participants that met age and service criteria at that time. In addition, a negative
plan



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##### Table of Contents

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements





amendment (Negative Amendment) was adopted for all other active participants who did not meet the age and service criteria. The Settlement and
the Negative Amendment eliminated post-retirement benefits for all active employees. The only remaining participants in the plan after September 30, 2007 are retired participants and their spouses, if applicable.

The components of the plans net periodic cost for the periods indicated are as follows:



|                             |  |                                 |      |   |                                |   |      |      |  |   |      |   |  |   |      |  
|---------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                             |  | Pension                         |     
|                             |  | Three months endedSeptember 30, |      |   | Nine months endedSeptember 30, |  
|                             |  | 2008                            |      |   | 2007                           |   |      | 2008 |  |   | 2007 |  
|                             |  | (In thousands)                  |     
|Interest cost                |  | $                               | 64   |   |                                | $ | 60   |      |  | $ | 193  |   |  | $ | 180  |  
|Expected return on assets    |  |                                 | (108 | ) |                                |   | (100 | )    |  |   | (325 | ) |  |   | (300 | )
|                             |  |                                 |      |   |                                |   |      |      |  |   |      |   |  |   |      |  
|Net periodic pension benefit |  | $                               | (44  | ) |                                | $ | (40  | )    |  | $ | (132 | ) |  | $ | (120 | )
|                             |  |                                 |      |   |                                |   |      |      |  |   |      |   |  |   |      |  



|                                                          |  |                                 |     |                                |      |   |      |  |   |      |   |  |   |    
|--------------------------------------------------------- |  | ------------------------------- | --- | ------------------------------ | ---- | - | ---- |  | - | ---- | - |  | - | ---
|                                                          |  | Post-retirement                
|                                                          |  | Three months endedSeptember 30, |     | Nine months endedSeptember 30,
|                                                          |  | 2008                            |     |                                | 2007 |   | 2008 |  |   | 2007
|                                                          |  | (In thousands)                 
|Service cost                                              |  | $                               |    |                                |      | $ | 44   |  | $ |     |   |  | $ | 133
|Interest cost                                             |  |                                 | 60  |                                |      |   | 86   |  |   | 180  |   |  |   | 259
|Amortization of unrecognized prior service cost (benefit) |  |                                 | (11 | )                              |      |   | 16   |  |   | (33  | ) |  |   | 46 
|                                                          |  |                                 |     |                                |      |   |      |  |   |      |   |  |   |    
|Net periodic post-retirement cost                         |  | $                               | 49  |                                |      | $ | 146  |  | $ | 147  |   |  | $ | 438
|                                                          |  |                                 |     |                                |      |   |      |  |   |      |   |  |   |    



|7. | Fair Value Measurements
|-- | -----------------------

Effective January 1, 2008, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value under accounting principles
generally accepted in the United States (GAAP) and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability in the principal or
most advantageous market in an orderly transaction between market participants at the measurement date. There was no cumulative effect adjustment in adopting SFAS 157.

In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of FAS 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides companies with an
option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of
assets and liabilities. The new standard is effective for the Company on January 1, 2008. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an 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. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

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.



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##### Table of Contents

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements





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 for substantially the full term of the assets or liabilities.

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.

The Company used the following methods and significant assumptions to estimate fair value:

Securities  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. The fair value of mutual fund securities
available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges. Securities available-for-sale are measured at fair value on a recurring basis. At September 30, 2008, $1.0 million and $289.2 million
were measured using Level 1 and Level 2 inputs, respectively within the fair value hierarchy.

Loans held-for-sale  The fair value of loans
held-for-sale is determined, when possible, using quoted secondary-market prices. 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.

Leases held-for-sale  The fair value of leases held-for-sale is primarily determined using an unadjusted quoted price for those leases, when
available. If no such quoted price exists, the fair value of a lease is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that lease.

Mortgage servicing rights  The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates
assumptions that market participants would used in estimating future net servicing income. The Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness.

Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. 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 and the related non-recurring fair value measurement
adjustments have generally been classified as Level 2. Estimates of fair value used for other collateral supporting commercial loans generally are not observable in the marketplace and therefore, such valuations have been classified as Level 3.
Loans subject to non-recurring fair value measurement using Level 3 inputs had a gross carrying amount of $1.4 million with an associated valuation allowance of $193,000 for a fair value of $1.2 million at September 30, 2008.



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

General

Throughout this analysis, the term the Company refers to the consolidated entity of Alliance
Financial Corporation, its wholly-owned subsidiaries Ladds Agency, Inc. and Alliance Bank, N.A. (the Bank), and the Banks subsidiaries, Alliance Preferred Funding Corp. and Alliance Leasing, Inc. The Company is a New York
corporation which was formed in November 1998 as a result of the merger of Cortland First Financial Corporation and Oneida Valley Bancshares, Inc.

The
following discussion presents material changes in the Companys results of operations and financial condition during the three and nine months ended September 30, 2008, which are not otherwise apparent from the consolidated financial
statements included in this report.

This discussion and analysis contains certain forward-looking statements (within the meaning of the Private Securities
Litigation Reform Act of 1995) with respect to the financial condition, results of operations and business of the Company. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements include, among others, the following possibilities:



| |  |  | an increase in competitive pressures in the banking industry;
| | - |  | -------------------------------------------------------------



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



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



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



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



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



| |  |  | changes in the securities markets;
| | - |  | ----------------------------------



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



| |  |  | our ability to maintain and increase market share and control expenses;
| | - |  | -----------------------------------------------------------------------



| |  |  | changes in key management personnel may adversely impact our operations; and
| | - |  | ----------------------------------------------------------------------------



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

Operating results for the three months and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2008.

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2008 and 2007

General

Net income was $3.0 million, or $0.65
per diluted share in the third quarter of 2008, an increase of $600,000 or 24.9% compared to net income of $2.4 million or $0.51 per diluted share for the same period in 2007. The return on average assets and return on average shareholders
equity were 0.92% and 10.42%, respectively, for the three months ended September 30, 2008, compared with 0.75% and 8.65%, respectively, for the third quarter of 2007.

Net income was $8.0 million or $1.73 per diluted share for the nine months ended September 30, 2008, an increase of $936,000 or 13.3% compared with $7.0 million or $1.47 per diluted share for the nine months
ended September 30, 2007. The return on average assets and return on average shareholders equity were 0.81% and 9.17%, respectively, for the nine months ended September 30, 2008, compared with 0.74% and 8.48%, respectively, for the
same period in 2007.

The changes in net income and earnings per share in the three months and nine months ended September 30, 2008 reflect higher net
interest income and tight control of expenses which offset higher credit costs.



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##### Table of Contents

Net Interest Income

Net interest income totaled $9.6 million in the three months ended September 30, 2008, an increase of $1.4 million compared with the third quarter of 2007. Interest income decreased $1.3 million or 7.2% in the third quarter of 2008
compared with the year-ago quarter, and interest expense decreased $2.7 million or 27.2%.

The Companys tax-equivalent net interest margin increased
39 basis points in the third quarter compared with the year-ago quarter, and was up 4 basis points compared with the second quarter of 2008. The net interest margin on a tax-equivalent basis was 3.43% in the third quarter of 2008, compared with
3.04% in the third quarter of 2007 and 3.39% in the second quarter of 2008. The increase in the Companys net interest margin was the result of a decrease in the Companys cost of funds by 111 basis points in the third quarter compared
with the year-ago quarter, which was partly offset by a decrease in the tax-equivalent earning asset yield of 58 basis points over the same period.

Average interest-earning assets increased $27.5 million in the third quarter compared with the year-ago period, due primarily to growth in the securities and residential mortgage portfolios which offset declines in the commercial loan and
lease portfolios. Loans and leases comprised 76.1% of average interest-earning assets in the third quarter, compared with 77.0% in the third quarter of 2007. The slightly lower proportion of earning assets in loans and leases, combined with general
downward repricing of the Companys earning assets as a result of lower short-term interest rates, contributed to a decrease in the Companys tax-equivalent earning asset yield to 5.85% in 2008, compared with 6.43% in the year-ago quarter
and 5.89% in the second quarter of 2008. The yield on commercial and consumer loans has been most affected by the drop in short-term interest rates, due to the greater prevalence in these portfolios of rates tied to the prime rate or other
short-term indexes and due to the shorter-term rate adjustment characteristics of these portfolios.

The Companys cost of funds was 2.75% in the
third quarter, compared with 3.86% in the year-ago quarter and 2.82% in the second quarter of 2008. The Companys wholesale funding costs have dropped considerably in the third quarter due to lower market interest rates. The Company has also
been actively managing its deposit costs by lowering offering rates on most demand, money market and time account products. As a result of these deposit pricing strategies and lower market interest rates, the Company has significantly reduced its
deposit costs in the third quarter of 2008 compared with the year-ago quarter, including a 111 basis point reduction in time deposit yields and a 131 basis point reduction in the yield on money market accounts.

The growth in average interest-earning assets was funded by higher interest-bearing demand and money market accounts and borrowings. Average time accounts decreased
$69.5 million compared with the third quarter of 2007 and comprised 35.7% of total average interest-bearing liabilities in the third quarter, compared with 43.4% in the year-ago quarter. Much of the decrease in time deposits occurred in the first
quarter of 2008, as retention of maturing retail time deposits in the first quarter was lower than the first quarter of 2007 due in large part to the significant difference between the rates on accounts which matured or repriced during this period
and the Companys offering rates. During the first quarter of 2008, the net decrease in retail time deposits (excluding brokered time deposits) totaled $31.7 million, or 30.0% of total balances that matured, and were comprised in large part of
rate-sensitive customers who typically had few other relationships with the bank. Approximately $105.9 million of retail time accounts matured or repriced in the first quarter of 2008 at an average rate of 4.59%. The Company elected to not pay rates
needed to retain these higher rate accounts. By way of comparison, the Companys weekly average offering rate on its one year time account was 2.98% in the first quarter of 2008.

The Company expanded its utilization of longer term wholesale funding (brokered time accounts and borrowings) in the first quarter of 2008 as a cost-effective alternative to short term, rate sensitive retail time
accounts that matured in the first quarter. As a result, average brokered time accounts grew to represent 23.9% of average time accounts in the third quarter of 2008, compared with 19.1% in the third quarter of 2007. Together, brokered time deposits
and borrowings totaled 29.8% of total interest-bearing liabilities in the third quarter of 2008, compared with 25.7% in the year-ago period.

The Company
experienced a net inflow of retail time account balances (excluding brokered time deposits) in the third quarter of 2008 of $7.0 million as a result of a strong retention rate for existing accounts and new account growth.

Net interest income for the nine months ended September 30, 2008 totaled $27.9 million, an increase of 14.5% compared with $24.3 million in the year-ago period.
Average earning assets increased $39.8 million in the first nine months of 2008 compared with the year-ago period. The tax-equivalent net interest margin was 3.32% in the first nine months of 2008, compared with 3.03% for the same period of 2007. A
decrease of 41 basis points in the Companys tax-equivalent earning assets yield in the first nine months of 2008 compared with the same period in 2007 was offset by an 80 basis point decrease in its cost of funds over the same period.



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##### Table of Contents

Changes in net interest income and net interest margin for the first nine months of 2008 compared with the same period in
2007 were driven largely by the same factors in the analysis of the third quarter of 2008 to the third quarter of 2007 discussed above.

The magnitude of
increase in our net interest margin slowed considerably in the third quarter compared with the second quarter growth rate. The opportunity for continued improvement in our net interest margin is likely to be limited, and it is possible that the
Companys net interest margin could begin to decline in coming quarters. The Companys net interest margin will be significantly impacted by a number of factors, including the amount and composition of earning assets, competition for
deposits, the Companys liquidity position and changes in market interest rates.

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.



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##### Table of Contents

|                                                                                                         |  |                                          |           |   |                     |   |           |  |      |                |  |   |                     |   |           |   |        |  |      |  
|-------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | --------- | - | ------------------- | - | --------- |  | ---- | -------------- |  | - | ------------------- | - | --------- | - | ------ |  | ---- | -
|                                                                                                         |  | For the three months ended September 30, |          
|                                                                                                         |  | 2008                                     |           |   | 2007                |  
|                                                                                                         |  | AverageBalance                           |           |   | InterestEarned/Paid |   | YieldRate |  |      | AverageBalance |  |   | InterestEarned/Paid |   | YieldRate |  
|                                                                                                         |  | (Dollars in thousands)                   |          
|Assets:                                                                                                  |  |                                          |           |   |                     |   |           |  |      |                |  |   |                     |   |           |   |        |  |      |  
|Interest earning assets:                                                                                 |  |                                          |           |   |                     |   |           |  |      |                |  |   |                     |   |           |   |        |  |      |  
|Federal funds sold                                                                                       |  | $                                        | 1,596     |   |                     | $ | 9         |  | 2.26 | %              |  | $ | 269                 |   |           | $ | 4      |  | 5.95 | %
|Taxable investment securities                                                                            |  |                                          | 181,093   |   |                     |   | 2,076     |  | 4.59 | %              |  |   | 173,203             |   |           |   | 1,991  |  | 4.60 | %
|Nontaxable investment securities                                                                         |  |                                          | 89,053    |   |                     |   | 1,347     |  | 6.05 | %              |  |   | 83,920              |   |           |   | 1,285  |  | 6.12 | %
|FHLB and FRB stock                                                                                       |  |                                          | 11,002    |   |                     |   | 174       |  | 6.33 | %              |  |   | 8,713               |   |           |   | 129    |  | 5.92 | %
|Real estate loans(1)                                                                                     |  |                                          | 301,338   |   |                     |   | 4,452     |  | 5.91 | %              |  |   | 265,633             |   |           |   | 4,029  |  | 6.07 | %
|Commercial loans                                                                                         |  |                                          | 203,933   |   |                     |   | 3,377     |  | 6.62 | %              |  |   | 212,899             |   |           |   | 4,433  |  | 8.33 | %
|Nontaxable commercial loans                                                                              |  |                                          | 8,386     |   |                     |   | 139       |  | 6.65 | %              |  |   | 8,474               |   |           |   | 152    |  | 7.15 | %
|Taxable leases (net of unearned discount)(1)                                                             |  |                                          | 100,782   |   |                     |   | 1,546     |  | 6.14 | %              |  |   | 112,261             |   |           |   | 1,863  |  | 6.64 | %
|Nontaxable leases (net of unearned discount)                                                             |  |                                          | 15,696    |   |                     |   | 245       |  | 6.26 | %              |  |   | 18,319              |   |           |   | 265    |  | 5.79 | %
|Indirect auto loans                                                                                      |  |                                          | 181,747   |   |                     |   | 2,566     |  | 5.65 | %              |  |   | 182,285             |   |           |   | 2,578  |  | 5.66 | %
|Consumer loans                                                                                           |  |                                          | 90,406    |   |                     |   | 1,390     |  | 6.15 | %              |  |   | 91,579              |   |           |   | 1,878  |  | 8.20 | %
|                                                                                                         |  |                                          |           |   |                     |   |           |  |      |                |  |   |                     |   |           |   |        |  |      |  
|Total interest-earning assets                                                                            |  | $                                        | 1,185,032 |   |                     | $ | 17,321    |  | 5.85 | %              |  | $ | 1,157,555           |   |           | $ | 18,607 |  | 6.43 | %
|                                                                                                         |  |                                          |           |   |                     |  
|Non-interest earning assets:                                                                             |  |                                          |           |   |                     |   |           |  |      |                |  |   |                     |   |           |   |        |  |      |  
|Other assets                                                                                             |  |                                          | 134,588   |   |                     |   |           |  |      |                |  |   | 131,876             |   |           |   |        |  |      |  
|Less: Allowance for credit losses                                                                        |  |                                          | (8,884    | ) |                     |   |           |  |      |                |  |   | (7,792              | ) |           |   |        |  |      |  
|Net unrealized gains (losses) on securities available-for-sale                                           |  |                                          | 356       |   |                     |   |           |  |      |                |  |   | (3,009              | ) |           |   |        |  |      |  
|                                                                                                         |  |                                          |           |   |                     |   |           |  |      |                |  |   |                     |   |           |   |        |  |      |  
|Total assets                                                                                             |  | $                                        | 1,311,092 |   |                     |   |           |  |      |                |  | $ | 1,278,630           |   |           |   |        |  |      |  
|                                                                                                         |  |                                          |           |   |                     |   |           |  |      |                |  |   |                     |   |           |   |        |  |      |  
|Liabilities and shareholders equity:                                                                    |  |                                          |           |   |                     |   |           |  |      |                |  |   |                     |   |           |   |        |  |      |  
|Interest bearing liabilities:                                                                            |  |                                          |           |   |                     |   |           |  |      |                |  |   |                     |   |           |   |        |  |      |  
|Demand deposits                                                                                          |  | $                                        | 107,410   |   |                     | $ | 177       |  | 0.66 | %              |  | $ | 98,959              |   |           | $ | 252    |  | 1.02 | %
|Savings deposits                                                                                         |  |                                          | 88,843    |   |                     |   | 124       |  | 0.56 | %              |  |   | 85,042              |   |           |   | 115    |  | 0.54 | %
|MMDA deposits                                                                                            |  |                                          | 226,134   |   |                     |   | 1,099     |  | 1.94 | %              |  |   | 188,892             |   |           |   | 1,533  |  | 3.25 | %
|Time deposits                                                                                            |  |                                          | 372,010   |   |                     |   | 3,480     |  | 3.74 | %              |  |   | 441,531             |   |           |   | 5,355  |  | 4.85 | %
|Borrowings                                                                                               |  |                                          | 221,855   |   |                     |   | 1,950     |  | 3.52 | %              |  |   | 176,784             |   |           |   | 2,072  |  | 4.69 | %
|Junior subordinated obligations issued to unconsolidated trusts                                          |  |                                          | 25,774    |   |                     |   | 325       |  | 5.04 | %              |  |   | 25,774              |   |           |   | 495    |  | 7.68 | %
|                                                                                                         |  |                                          |           |   |                     |   |           |  |      |                |  |   |                     |   |           |   |        |  |      |  
|Total interest-bearing liabilities                                                                       |  | $                                        | 1,042,026 |   |                     | $ | 7,155     |  | 2.75 | %              |  | $ | 1,016,982           |   |           | $ | 9,822  |  | 3.86 | %
|                                                                                                         |  |                                          |           |   |                     |  
|Non-interest bearing liabilities:                                                                        |  |                                          |           |   |                     |   |           |  |      |                |  |   |                     |   |           |   |        |  |      |  
|Demand deposits                                                                                          |  |                                          | 136,968   |   |                     |   |           |  |      |                |  |   | 129,436             |   |           |   |        |  |      |  
|Other liabilities                                                                                        |  |                                          | 16,501    |   |                     |   |           |  |      |                |  |   | 20,747              |   |           |   |        |  |      |  
|Shareholders equity                                                                                     |  |                                          | 115,597   |   |                     |   |           |  |      |                |  |   | 111,465             |   |           |   |        |  |      |  
|                                                                                                         |  |                                          |           |   |                     |   |           |  |      |                |  |   |                     |   |           |   |        |  |      |  
|Total liabilities and shareholders equity                                                               |  | $                                        | 1,311,092 |   |                     |   |           |  |      |                |  | $ | 1,278,630           |   |           |   |        |  |      |  
|                                                                                                         |  |                                          |           |   |                     |   |           |  |      |                |  |   |                     |   |           |   |        |  |      |  
|Net interest income (tax equivalent)                                                                     |  |                                          |           |   |                     | $ | 10,166    |  |      |                |  |   |                     |   |           | $ | 8,785  |  |      |  
|                                                                                                         |  |                                          |           |   |                     |   |           |  |      |                |  |   |                     |   |           |   |        |  |      |  
|Net interest margin (tax equivalent)                                                                     |  |                                          |           |   |                     |   |           |  | 3.43 | %              |  |   |                     |   |           |   |        |  | 3.04 | %
|Net interest rate spread                                                                                 |  |                                          |           |   |                     |   |           |  | 3.10 | %              |  |   |                     |   |           |   |        |  | 2.57 | %
|Federal tax exemption on non-taxable investment securities, loans and leases included in interest income |  |                                          |           |   |                     | $ | 587       |  |      |                |  |   |                     |   |           | $ | 579    |  |      |  
|                                                                                                         |  |                                          |           |   |                     |   |           |  |      |                |  |   |                     |   |           |   |        |  |      |  



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



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##### Table of Contents

|                                                                                                         |  |                                         |           |   |                      |   |           |  |      |                |  |   |                      |   |           |   |        |  |      |  
|-------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | --------- | - | -------------------- | - | --------- |  | ---- | -------------- |  | - | -------------------- | - | --------- | - | ------ |  | ---- | -
|                                                                                                         |  | For the nine months ended September 30, |          
|                                                                                                         |  | 2008                                    |           |   | 2007                 |  
|                                                                                                         |  | AverageBalance                          |           |   | InterestEarned /Paid |   | YieldRate |  |      | AverageBalance |  |   | InterestEarned /Paid |   | YieldRate |  
|                                                                                                         |  | (Dollars in thousands)                  |          
|Assets:                                                                                                  |  |                                         |           |   |                      |   |           |  |      |                |  |   |                      |   |           |   |        |  |      |  
|Interest earning assets:                                                                                 |  |                                         |           |   |                      |   |           |  |      |                |  |   |                      |   |           |   |        |  |      |  
|Federal funds sold                                                                                       |  | $                                       | 5,184     |   |                      | $ | 99        |  | 2.55 | %              |  | $ | 184                  |   |           | $ | 7      |  | 5.07 | %
|Taxable investment securities                                                                            |  |                                         | 186,483   |   |                      |   | 6,522     |  | 4.66 | %              |  |   | 170,953              |   |           |   | 5,728  |  | 4.47 | %
|Nontaxable investment securities                                                                         |  |                                         | 87,590    |   |                      |   | 4,033     |  | 6.14 | %              |  |   | 84,978               |   |           |   | 3,945  |  | 6.19 | %
|FHLB and FRB Stock                                                                                       |  |                                         | 10,740    |   |                      |   | 561       |  | 6.96 | %              |  |   | 8,563                |   |           |   | 435    |  | 6.77 | %
|Real estate loans(1)                                                                                     |  |                                         | 289,730   |   |                      |   | 12,863    |  | 5.92 | %              |  |   | 259,844              |   |           |   | 11,764 |  | 6.03 | %
|Commercial loans                                                                                         |  |                                         | 208,629   |   |                      |   | 10,781    |  | 6.89 | %              |  |   | 213,018              |   |           |   | 12,984 |  | 8.12 | %
|Nontaxable commercial loans                                                                              |  |                                         | 8,315     |   |                      |   | 418       |  | 6.70 | %              |  |   | 8,587                |   |           |   | 458    |  | 7.10 | %
|Taxable leases (net of unearned discount)(1)                                                             |  |                                         | 107,108   |   |                      |   | 5,033     |  | 6.26 | %              |  |   | 111,335              |   |           |   | 5,730  |  | 6.86 | %
|Nontaxable leases (net of unearned discount)                                                             |  |                                         | 16,504    |   |                      |   | 774       |  | 6.25 | %              |  |   | 19,697               |   |           |   | 862    |  | 5.83 | %
|Indirect loans                                                                                           |  |                                         | 177,648   |   |                      |   | 7,543     |  | 5.66 | %              |  |   | 181,148              |   |           |   | 7,430  |  | 5.47 | %
|Consumer loans                                                                                           |  |                                         | 90,686    |   |                      |   | 4,414     |  | 6.49 | %              |  |   | 90,519               |   |           |   | 5,501  |  | 8.10 | %
|                                                                                                         |  |                                         |           |   |                      |   |           |  |      |                |  |   |                      |   |           |   |        |  |      |  
|Total interest-earning assets                                                                            |  | $                                       | 1,188,617 |   |                      | $ | 53,041    |  | 5.95 | %              |  | $ | 1,148,826            |   |           | $ | 54,844 |  | 6.36 | %
|                                                                                                         |  |                                         |           |   |                      |  
|Non-interest earning assets:                                                                             |  |                                         |           |   |                      |   |           |  |      |                |  |   |                      |   |           |   |        |  |      |  
|Other assets                                                                                             |  |                                         | 132,833   |   |                      |   |           |  |      |                |  |   | 132,728              |   |           |   |        |  |      |  
|Less: Allowance for loan and lease losses                                                                |  |                                         | (8,648    | ) |                      |   |           |  |      |                |  |   | (7,486               | ) |           |   |        |  |      |  
|Net unrealized losses on securities available-for-sale                                                   |  |                                         | 2,431     |   |                      |   |           |  |      |                |  |   | (2,294               | ) |           |   |        |  |      |  
|                                                                                                         |  |                                         |           |   |                      |   |           |  |      |                |  |   |                      |   |           |   |        |  |      |  
|Total assets                                                                                             |  | $                                       | 1,315,233 |   |                      |   |           |  |      |                |  | $ | 1,271,774            |   |           |   |        |  |      |  
|                                                                                                         |  |                                         |           |   |                      |   |           |  |      |                |  |   |                      |   |           |   |        |  |      |  
|Liabilities and shareholders equity:                                                                    |  |                                         |           |   |                      |   |           |  |      |                |  |   |                      |   |           |   |        |  |      |  
|Interest bearing liabilities:                                                                            |  |                                         |           |   |                      |   |           |  |      |                |  |   |                      |   |           |   |        |  |      |  
|Demand deposits                                                                                          |  | $                                       | 106,920   |   |                      | $ | 564       |  | 0.70 | %              |  | $ | 97,004               |   |           | $ | 665    |  | 0.91 | %
|Savings deposits                                                                                         |  |                                         | 85,935    |   |                      |   | 361       |  | 0.56 | %              |  |   | 85,506               |   |           |   | 349    |  | 0.54 | %
|MMDA deposits                                                                                            |  |                                         | 221,721   |   |                      |   | 3,615     |  | 2.17 | %              |  |   | 195,958              |   |           |   | 4,673  |  | 3.18 | %
|Time deposits                                                                                            |  |                                         | 393,349   |   |                      |   | 12,030    |  | 4.08 | %              |  |   | 433,242              |   |           |   | 15,343 |  | 4.72 | %
|Borrowings                                                                                               |  |                                         | 216,349   |   |                      |   | 5,776     |  | 3.56 | %              |  |   | 177,746              |   |           |   | 6,223  |  | 4.67 | %
|Junior subordinated obligations issued to unconsolidated trusts                                          |  |                                         | 25,774    |   |                      |   | 1,066     |  | 5.51 | %              |  |   | 25,774               |   |           |   | 1,465  |  | 7.58 | %
|                                                                                                         |  |                                         |           |   |                      |   |           |  |      |                |  |   |                      |   |           |   |        |  |      |  
|Total interest-bearing liabilities                                                                       |  | $                                       | 1,050,048 |   |                      | $ | 23,412    |  | 2.97 | %              |  | $ | 1,015,230            |   |           | $ | 28,718 |  | 3.77 | %
|                                                                                                         |  |                                         |           |   |                      |  
|Non-interest bearing liabilities:                                                                        |  |                                         |           |   |                      |   |           |  |      |                |  |   |                      |   |           |   |        |  |      |  
|Demand deposits                                                                                          |  |                                         | 131,665   |   |                      |   |           |  |      |                |  |   | 126,304              |   |           |   |        |  |      |  
|Other liabilities                                                                                        |  |                                         | 17,542    |   |                      |   |           |  |      |                |  |   | 19,613               |   |           |   |        |  |      |  
|Shareholders equity                                                                                     |  |                                         | 115,978   |   |                      |   |           |  |      |                |  |   | 110,627              |   |           |   |        |  |      |  
|                                                                                                         |  |                                         |           |   |                      |   |           |  |      |                |  |   |                      |   |           |   |        |  |      |  
|Total liabilities and shareholders equity                                                               |  | $                                       | 1,315,233 |   |                      |   |           |  |      |                |  | $ | 1,271,774            |   |           |   |        |  |      |  
|                                                                                                         |  |                                         |           |   |                      |   |           |  |      |                |  |   |                      |   |           |   |        |  |      |  
|Net interest income (tax equivalent)                                                                     |  |                                         |           |   |                      | $ | 29,629    |  |      |                |  |   |                      |   |           | $ | 26,126 |  |      |  
|                                                                                                         |  |                                         |           |   |                      |   |           |  |      |                |  |   |                      |   |           |   |        |  |      |  
|Net interest margin (tax equivalent)                                                                     |  |                                         |           |   |                      |   |           |  | 3.32 | %              |  |   |                      |   |           |   |        |  | 3.03 | %
|Net interest rate spread                                                                                 |  |                                         |           |   |                      |   |           |  | 2.98 | %              |  |   |                      |   |           |   |        |  | 2.59 | %
|Federal tax exemption on non-taxable investment securities, loans and leases included in interest income |  |                                         |           |   |                      | $ | 1,776     |  |      |                |  |   |                      |   |           | $ | 1,790  |  |      |  
|                                                                                                         |  |                                         |           |   |                      |   |           |  |      |                |  |   |                      |   |           |   |        |  |      |  



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



-18-



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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.



|                                                                           |  |                                                                                                     |        |   |                                                                                                    |   |        |           |  |   |        |   |  |      |        |   |           |   |        |   |  |   |        |  
|-------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------- | ------ | - | -------------------------------------------------------------------------------------------------- | - | ------ | --------- |  | - | ------ | - |  | ---- | ------ | - | --------- | - | ------ | - |  | - | ------ | -
|                                                                           |  | For the three months endedSeptember 30, 2008compared
toSeptember 30, 2007Increase/(Decrease) Due To |        |   | For the nine months endedSeptember 30, 2008compared
toSeptember 30, 2007Increase/(Decrease) Due To |  
|                                                                           |  | Volume                                                                                              |        |   | Rate                                                                                               |   |        | NetChange |  |   | Volume |   |  | Rate |        |   | NetChange |  
|                                                                           |  | (In thousands)                                                                                      |       
|Federal funds sold                                                         |  | $                                                                                                   | 22     |   |                                                                                                    | $ | (17    | )         |  | $ | 5      |   |  | $    | 99     |   |           | $ | (7     | ) |  | $ | 92     |  
|Taxable investment securities                                              |  |                                                                                                     | 121    |   |                                                                                                    |   | (36    | )         |  |   | 85     |   |  |      | 536    |   |           |   | 258    |   |  |   | 794    |  
|Non-taxable investment securities                                          |  |                                                                                                     | 155    |   |                                                                                                    |   | (93    | )         |  |   | 62     |   |  |      | 138    |   |           |   | (50    | ) |  |   | 88     |  
|FHLB and FRB stock                                                         |  |                                                                                                     | 36     |   |                                                                                                    |   | 9      |           |  |   | 45     |   |  |      | 113    |   |           |   | 13     |   |  |   | 126    |  
|Real estate loans                                                          |  |                                                                                                     | 1,055  |   |                                                                                                    |   | (632   | )         |  |   | 423    |   |  |      | 1,460  |   |           |   | (361   | ) |  |   | 1,099  |  
|Commercial loans                                                           |  |                                                                                                     | (180   | ) |                                                                                                    |   | (876   | )         |  |   | (1,056 | ) |  |      | (263   | ) |           |   | (1,940 | ) |  |   | (2,203 | )
|Non-taxable commercial loans                                               |  |                                                                                                     | (2     | ) |                                                                                                    |   | (11    | )         |  |   | (13    | ) |  |      | (15    | ) |           |   | (25    | ) |  |   | (40    | )
|Taxable leases (net of unearned income)                                    |  |                                                                                                     | (182   | ) |                                                                                                    |   | (135   | )         |  |   | (317   | ) |  |      | (212   | ) |           |   | (485   | ) |  |   | (697   | )
|Non-taxable leases (net of unearned income)                                |  |                                                                                                     | (122   | ) |                                                                                                    |   | 102    |           |  |   | (20    | ) |  |      | (175   | ) |           |   | 87     |   |  |   | (88    | )
|Indirect loans                                                             |  |                                                                                                     | (8     | ) |                                                                                                    |   | (4     | )         |  |   | (12    | ) |  |      | (207   | ) |           |   | 320    |   |  |   | 113    |  
|Consumer loans                                                             |  |                                                                                                     | (24    | ) |                                                                                                    |   | (464   | )         |  |   | (488   | ) |  |      | 17     |   |           |   | (1,104 | ) |  |   | (1,087 | )
|                                                                           |  |                                                                                                     |        |   |                                                                                                    |   |        |           |  |   |        |   |  |      |        |   |           |   |        |   |  |   |        |  
|Total interest-earning assets                                              |  |                                                                                                     | 871    |   |                                                                                                    |   | (2,157 | )         |  |   | (1,286 | ) |  |      | 1,491  |   |           |   | (3,294 | ) |  |   | (1,803 | )
|                                                                           |  |                                                                                                     |        |   |                                                                                                    |   |        |           |  |   |        |   |  |      |        |   |           |   |        |   |  |   |        |  
|Interest-bearing demand deposits                                           |  |                                                                                                     | 124    |   |                                                                                                    |   | (199   | )         |  |   | (75    | ) |  |      | 95     |   |           |   | (196   | ) |  |   | (101   | )
|Savings deposits                                                           |  |                                                                                                     | 5      |   |                                                                                                    |   | 4      |           |  |   | 9      |   |  |      | 2      |   |           |   | 10     |   |  |   | 12     |  
|MMDA deposits                                                              |  |                                                                                                     | 1,478  |   |                                                                                                    |   | (1,912 | )         |  |   | (434   | ) |  |      | 846    |   |           |   | (1,904 | ) |  |   | (1,058 | )
|Time deposits                                                              |  |                                                                                                     | (765   | ) |                                                                                                    |   | (1,110 | )         |  |   | (1,875 | ) |  |      | (1,335 | ) |           |   | (1,978 | ) |  |   | (3,313 | )
|Borrowings                                                                 |  |                                                                                                     | 2,031  |   |                                                                                                    |   | (2,153 | )         |  |   | (122   | ) |  |      | 1,668  |   |           |   | (2,115 | ) |  |   | (447   | )
|Junior subordinated obligations issued to unconsolidated subsidiary trusts |  |                                                                                                     |       |   |                                                                                                    |   | (170   | )         |  |   | (170   | ) |  |      |       |   |           |   | (399   | ) |  |   | (399   | )
|                                                                           |  |                                                                                                     |        |   |                                                                                                    |   |        |           |  |   |        |   |  |      |        |   |           |   |        |   |  |   |        |  
|Total interest-bearing liabilities                                         |  |                                                                                                     | 2,873  |   |                                                                                                    |   | (5,540 | )         |  |   | (2,667 | ) |  |      | 1,276  |   |           |   | (6,582 | ) |  |   | (5,306 | )
|                                                                           |  |                                                                                                     |        |   |                                                                                                    |   |        |           |  |   |        |   |  |      |        |   |           |   |        |   |  |   |        |  
|Net interest income tax equivalent                                         |  | $                                                                                                   | (2,002 | ) |                                                                                                    | $ | 3,383  |           |  | $ | 1,381  |   |  | $    | 215    |   |           | $ | 3,288  |   |  | $ | 3,503  |  
|                                                                           |  |                                                                                                     |        |   |                                                                                                    |   |        |           |  |   |        |   |  |      |        |   |           |   |        |   |  |   |        |  



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Asset Quality and the Allowance for Credit Losses

Loans and leases past due 30 days or more totaled $10.9 million or 1.20% of total loans and leases at September 30, 2008, compared with $12.8 million or 1.42% of total loans and leases at June 30 and $16.4
million or 1.84% of total loans and leases at December 31, 2007. The Companys delinquencies at September 30, 2008 are not unduly concentrated in any one segment of the loan and lease portfolio. Residential mortgages and commercial
loans, the two largest segments of our loan and lease portfolio, comprised the largest portion of total delinquencies, at 44.5% and 35.4%, respectively, of total delinquencies.

The following table represents information concerning the aggregate amount of non-performing assets:



|                                                     |  |                   |       |              |   |                  |  |   |      
|---------------------------------------------------- |  | ----------------- | ----- | ------------ | - | ---------------- |  | - | -----
|                                                     |  | September 30,2008 |       | June 30,2008 |   | December 31,2007
|Non-accruing loans and leases:                       |  |                   |       |              |   |                  |  |   |      
|Residential real estate loans                        |  | $                 | 1,336 |              | $ | 1,221            |  | $ | 1,118
|Commercial loans                                     |  |                   | 2,674 |              |   | 2,525            |  |   | 4,988
|Leases                                               |  |                   | 159   |              |   | 1,654            |  |   | 320  
|Indirect loans                                       |  |                   | 107   |              |   | 115              |  |   | 83   
|Other consumer loans                                 |  |                   | 231   |              |   | 261              |  |   | 158  
|                                                     |  |                   |       |              |   |                  |  |   |      
|Total non-accruing loans and leases                  |  |                   | 4,507 |              |   | 5,776            |  |   | 6,667
|Accruing loans and leases delinquent 90 days or more |  |                   | 217   |              |   | 52               |  |   | 39   
|                                                     |  |                   |       |              |   |                  |  |   |      
|Total non-performing loans and leases                |  |                   | 4,724 |              |   | 5,828            |  |   | 6,706
|Other real estate and repossessed assets             |  |                   | 328   |              |   | 138              |  |   | 229  
|                                                     |  |                   |       |              |   |                  |  |   |      
|Total non-performing assets                          |  | $                 | 5,052 |              | $ | 5,966            |  | $ | 6,935
|                                                     |  |                   |       |              |   |                  |  |   |      

Nonperforming loans and leases, which are included in past due loans and leases discussed above, were $4.7 million
or 0.52% of total loans and leases at September 30, 2008, which was a decrease of $1.1 million from June 30, 2008, and was $2.0 million lower than December 31, 2007. Conventional residential mortgages comprised $1.3 million (21 loans)
or 29.6% of nonperforming loans and leases at September 30. The largest single nonperforming loan at the end of the third quarter was a commercial credit that was written down in the first quarter of 2008 to its estimated collectible amount of
$600,000. The largest single nonperforming relationship at June 30, 2008, a $1.5 million commercial lease, was returned to performing status in the third quarter following the receipt of all payments that were due.

The decrease in nonperforming loans and leases compared with December 31, 2007 resulted largely from a $2.4 million decrease in nonperforming commercial loans
during the first quarter of 2008. This reduction was due primarily to principal pay-downs, collateral liquidation and charge-offs with respect to the two largest nonperforming loans at that time.

As a recurring part of its portfolio management program, the Company has identified approximately $10.2 million in potential problem loans at September 30, 2008, as
compared to $8.0 million at June 30, 2008 and $5.4 million at December 31, 2007. The average balance of potential problem loans was $270,000 at September 30, 2008 compared with $259,000 and $208,000 at June 30, 2008 and
December 31, 2007, respectively. 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 September 30, 2008, potential problem loans primarily consisted of commercial real estate and commercial loans. 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



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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 September 30, 2008, there was $1.4 million in impaired loans for which $193,000 in related allowance for credit losses was allocated. As of June 30, 2008 and December 31, 2007, there were $1.6 million and $4.2
million respectively in impaired loans for which $522,000 and $1.3 million in related allowance for credit losses was 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 $250,000 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 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 provision for credit losses was $849,000 and $3.5 million in the quarter and nine months ended
September 30, 2008, respectively, compared with $1.1 million and $2.6 million in the year-ago periods, respectively. Net charge-offs were $625,000 and $3.1 million in the three months and nine months ended September 30, 2008, respectively,
compared with $815,000 and $1.8 million in the year-ago periods, respectively. The increase in net charge-offs in the first nine months of 2008 was due largely to comprehensive liquidation strategies implemented in the first quarter on the two
largest non-performing commercial relationships at that time, which resulted in charge-offs of $1.2 million or 65% of the first quarters total gross charge-offs. The increased level of provisions in the first nine months of 2008 is a
reflection of higher charge-offs in the first half of 2008 and managements assessment of the potential impact on the Companys portfolio of macroeconomic factors and credit market conditions affecting the financial sector generally. The
Company has no direct exposure to the various types of high risk residential mortgages currently impacting the financial sector. The provision for credit losses as a percentage of net charge-offs was 135.8% and 114.6%, respectively, in the quarter
and nine months ended September 30, 2008, compared with 139.9% and 147.5%, respectively, in the year-ago periods.

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



|                                                                         |  |                                     |   |  |                                    |   |  |       |   |  |       |  
|------------------------------------------------------------------------ |  | ----------------------------------- | - |  | ---------------------------------- | - |  | ----- | - |  | ----- | -
|                                                                         |  | For three months endedSeptember 30, |   |  | For nine months endedSeptember 30, |  
|                                                                         |  | 2008                                |   |  | 2007                               |   |  | 2008  |   |  | 2007  |  
|Net loans and leases charged-off to average loans and leases, annualized |  | 0.28                                | % |  | 0.37                               | % |  | 0.46  | % |  | 0.26  | %
|Provision for credit losses to average loans and leases, annualized      |  | 0.38                                | % |  | 0.51                               | % |  | 0.52  | % |  | 0.39  | %
|Allowance for credit losses to period-end loans and leases               |  | 0.97                                | % |  | 0.88                               | % |  | 0.97  | % |  | 0.88  | %
|Allowance for credit losses to non-performing loans and leases           |  | 187.9                               | % |  | 176.1                              | % |  | 187.9 | % |  | 176.1 | %
|Non-performing loans and leases to period-end loans and leases           |  | 0.52                                | % |  | 0.50                               | % |  | 0.52  | % |  | 0.50  | %
|Non-performing assets to period-end assets                               |  | 0.37                                | % |  | 0.37                               | % |  | 0.37  | % |  | 0.37  | %



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##### Table of Contents

Non-interest Income

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



|                                              |  |                                  |       |      |                                 |        |  |   |      |   |      |       |        |   |   |        |  |   |        |  |   |      |   |  |       |   
|--------------------------------------------- |  | -------------------------------- | ----- | ---- | ------------------------------- | ------ |  | - | ---- | - | ---- | ----- | ------ | - | - | ------ |  | - | ------ |  | - | ---- | - |  | ----- | --
|                                              |  | Three months ended September 30, |       |      | Nine months ended September 30, |       
|                                              |  | 2008                             |       | 2007 |                                 | Change |  |   | 2008 |   | 2007 |       | Change |  
|                                              |  |                                  | $     |      |                                 | %      |  |   |      |   | $    |       |        | % |  
|Investment management income                  |  | $                                | 2,179 |      | $                               | 2,335  |  | $ | (156 | ) |      | (6.7  | )%     |   | $ | 6,717  |  | $ | 6,834  |  | $ | (117 | ) |  | (1.7  | )%
|Service charges on deposit accounts           |  |                                  | 1,379 |      |                                 | 1,382  |  |   | (3   | ) |      | (0.2  | )%     |   |   | 3,869  |  |   | 3,924  |  |   | (55  | ) |  | (1.4  | )%
|Card-related fees                             |  |                                  | 533   |      |                                 | 486    |  |   | 47   |   |      | 9.7   | %      |   |   | 1,578  |  |   | 1,421  |  |   | 157  |   |  | 11.0  | % 
|Insurance agency income                       |  |                                  | 384   |      |                                 | 479    |  |   | (95  | ) |      | (19.8 | )%     |   |   | 1,204  |  |   | 1,335  |  |   | (131 | ) |  | (9.8  | )%
|Income from bank-owned life insurance         |  |                                  | 243   |      |                                 | 160    |  |   | 83   |   |      | 51.9  | %      |   |   | 606    |  |   | 473    |  |   | 133  |   |  | 28.1  | % 
|Gain on the sale of loans                     |  |                                  | 55    |      |                                 | 46     |  |   | 9    |   |      | 19.6  | %      |   |   | 217    |  |   | 129    |  |   | 88   |   |  | 68.2  | % 
|Gain on sale of securities available-for-sale |  |                                  |      |      |                                 |       |  |   |     |   |      |      |        |   |   | 137    |  |   |       |  |   | 137  |   |  | 100   | % 
|Other non-interest income                     |  |                                  | 361   |      |                                 | 544    |  |   | (183 | ) |      | (33.6 | )%     |   |   | 1,278  |  |   | 1,471  |  |   | (193 | ) |  | (13.1 | )%
|                                              |  |                                  |       |      |                                 |        |  |   |      |   |      |       |        |   |   |        |  |   |        |  |   |      |   |  |       |   
|Total non-interest income                     |  | $                                | 5,134 |      | $                               | 5,432  |  | $ | (298 | ) |      | (5.5  | )%     |   | $ | 15,606 |  | $ | 15,587 |  | $ | 19   |   |  | 0.1   | % 
|                                              |  |                                  |       |      |                                 |        |  |   |      |   |      |       |        |   |   |        |  |   |        |  |   |      |   |  |       |   

Non-interest income decreased $298,000 or 5.5% in the third quarter of 2008 compared with the third quarter of
2007. Investment management income decreased $156,000 or 6.7% in the third quarter compared with the year-ago quarter. This lower income level is the result of the impact of declines in equity markets in 2008 on the managed investment management
portfolio. At September 30, 2008, the S&P 500 Index and the Dow Jones Industrial Average were down 20.6% and 16.6% respectively since December 31, 2007. These market declines have caused similar declines in the levels and values of
assets managed by the Company, and on the fees generated from these managed assets. Despite this, the Companys account retention rates remain at levels consistent with our historical norms.

Other non-interest income declined $183,000 or 33.6% in the third quarter of 2008 compared with the year-ago quarter due primarily to non-recurring income in the third
quarter of 2007.

Non-interest income comprised 34.9% of total revenue in the third quarter of 2008 compared with 39.8% in the year-ago quarter and 35.7%
in the second quarter of 2008. The decline in this ratio has been driven largely by the increase in net interest income. Non-interest income totaled $15.6 million in the first nine months of 2008, which is virtually unchanged from the year-ago
period.



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##### Table of Contents

Non-interest Expenses

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



|                                  |  |                                      |       |      |                                     |        |  |   |      |   |      |       |        |   |   |        |  |   |        |  |   |       |   |  |       |   
|--------------------------------- |  | ------------------------------------ | ----- | ---- | ----------------------------------- | ------ |  | - | ---- | - | ---- | ----- | ------ | - | - | ------ |  | - | ------ |  | - | ----- | - |  | ----- | --
|                                  |  | For three months ended September 30, |       |      | For nine months ended September 30, |       
|                                  |  | 2008                                 |       | 2007 |                                     | Change |  |   | 2008 |   | 2007 |       | Change |  
|                                  |  |                                      | $     |      |                                     | %      |  |   |      |   | $    |       |        | % |  
|Salaries and benefits             |  | $                                    | 5,108 |      | $                                   | 4,634  |  | $ | 474  |   |      | 10.2  | %      |   | $ | 15,025 |  | $ | 13,631 |  | $ | 1,394 |   |  | 10.2  | % 
|Occupancy and equipment           |  |                                      | 1,751 |      |                                     | 1,560  |  |   | 191  |   |      | 12.2  | %      |   |   | 5,148  |  |   | 5,087  |  |   | 61    |   |  | 1.2   | % 
|Communication expense             |  |                                      | 200   |      |                                     | 174    |  |   | 26   |   |      | 14.9  | %      |   |   | 602    |  |   | 583    |  |   | 19    |   |  | 3.3   | % 
|Office supplies and postage       |  |                                      | 310   |      |                                     | 325    |  |   | (15  | ) |      | (4.6  | )%     |   |   | 861    |  |   | 908    |  |   | (47   | ) |  | (5.2  | )%
|Marketing expense                 |  |                                      | 278   |      |                                     | 296    |  |   | (18  | ) |      | (6.1  | )%     |   |   | 847    |  |   | 1,012  |  |   | (165  | ) |  | (16.3 | )%
|Amortization of intangible assets |  |                                      | 411   |      |                                     | 435    |  |   | (24  | ) |      | (5.5  | )%     |   |   | 1,234  |  |   | 1,319  |  |   | (85   | ) |  | (6.4  | )%
|Professional fees                 |  |                                      | 602   |      |                                     | 670    |  |   | (68  | ) |      | (10.1 | )%     |   |   | 1,964  |  |   | 2,097  |  |   | (133  | ) |  | (6.3  | )%
|Other operating expenses          |  |                                      | 1,239 |      |                                     | 1,256  |  |   | (17  | ) |      | (1.4  | )%     |   |   | 3,642  |  |   | 3,505  |  |   | 137   |   |  | 3.9   | % 
|                                  |  |                                      |       |      |                                     |        |  |   |      |   |      |       |        |   |   |        |  |   |        |  |   |       |   |  |       |   
|Total operating expenses          |  | $                                    | 9,899 |      | $                                   | 9,350  |  | $ | 549  |   |      | 5.9   | %      |   | $ | 29,323 |  | $ | 28,142 |  | $ | 1,181 |   |  | 4.2   | % 
|                                  |  |                                      |       |      |                                     |        |  |   |      |   |      |       |        |   |   |        |  |   |        |  |   |       |   |  |       |   

Non-interest expenses increased $549,000 or 5.9% in the third quarter of 2008 compared with the third quarter of
2007.

Non-interest expenses were $29.3 million in the nine months ended September 30, 2008, an increase of 4.2% compared with $28.1 million in the
same year ago time period.

Salaries and benefits increased in the three months and nine months ended September 30, 2008 compared with the year-ago
periods due largely to normal salary increases, greater participation in the Companys 401(k) plan in 2008 and lower incentive-based compensation expense in 2007. Decreases in other expense categories were due largely to a heightened focus in
2008 on expense control.

The Companys efficiency ratio was 67.3% in the third quarter of 2008, compared with 68.6% in the year-ago quarter and 65.1%
in the second quarter of 2008. The Companys efficiency ratio was 67.8% in the nine months ended September 30, 2008, compared with 70.5% in the year-ago period.

Income Taxes

The Companys effective tax rate was 24.1% and 24.9%, respectively, for the quarter and nine
months ended September 30, 2008, compared with 23.4% for both the quarter and nine months in the year-ago periods. The increase in the effective tax rate in 2008 primarily reflects a decline in the percentage of non-taxable income to pre-tax
income.



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##### Table of Contents

Comparison of Financial Condition at September 30, 2008 and December 31, 2007

General

Total assets were $1.3 billion at September 30, 2008,
which increased slightly from December 31, 2007. Total loans and leases (net of unearned income) were $916.0 million at September 30, 2008, compared with $902.3 million and $895.5 million at June 30, 2008 and December 31, 2007,
respectively.

Securities

The Companys
investment securities portfolio totaled $290.2 million at September 30, 2008, compared with $269.4 million and $272.7 million at June 30, 2008 and December 31, 2007, respectively. The Companys portfolio is comprised entirely of
investment grade securities, most of which are rated AAA by one or more of the nationally recognized rating agencies. Mortgage-backed securities totaled $158.9 million at September 30, 2008, and 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 supported by the full faith and credit of the United States Government.

The Company does not invest in any securities backed by sub-prime, Alt-A or other high-risk mortgages. The Company also does not hold any preferred stock, corporate debt
or trust preferred securities in its investment portfolio.

Net unrealized losses on securities available-for-sale totaled $635,000 or 0.2% of the
amortized cost of the securities portfolio at September 30, 2007.

Loans and Leases

Total loans and leases (net of unearned income) were $916.0 million at September 30, 2008, compared with $895.5 million at December 31, 2007. Growth in the
Companys consumer lending businesses in the third quarter outpaced slight declines in commercial loans and leases.

The Companys residential
mortgage origination volume increased $5.9 million or 32% in the third quarter compared with the year-ago period, and was up $28.0 million or 53% for the first nine months of 2008 compared with the same period in 2007. Alliance has increased its
share of the local residential mortgage market due largely to a focused expansion of and investment in the Companys mortgage business in Central New York. The Company continues to originate only conventional residential mortgages in its local
markets, and has not originated sub-prime, Alt-A, negative amortizing or other higher risk residential mortgages.

Indirect auto loans increased $4.6
million or 2.5% in the third quarter. The Company originates auto loans through a network of reputable, well established automobile dealers located in Central and Western New York. Applications received through the Companys indirect lending
program are subject to the same comprehensive underwriting criteria and procedures as its direct lending program.

Leases net of unearned income decreased
$3.9 million or 3.3% in the third quarter as the Company reduced origination volumes during the quarter. In connection with the Companys ongoing strategic review and balance sheet management processes, it intends to reduce future lease
originations to levels substantially below those of recent years. As a result, the lease portfolio is projected to amortize at the rate of approximately $9 million per quarter over the next year. The cash flow from the amortization of the portfolio
will be used to reduce our wholesale funding. Related expense reductions are expected to mitigate the impact of reduced revenue as a result of this action during the next year.



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##### Table of Contents

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



|                                |  |                    |         |   |         |       |   |                   |   |         |         |  |       |  
|------------------------------- |  | ------------------ | ------- | - | ------- | ----- | - | ----------------- | - | ------- | ------- |  | ----- | -
|                                |  | September 30, 2008 |         |   | Percent |       |   | December 31, 2007 |   |         | Percent | 
|Residential real estate loans   |  | $                  | 305,302 |   |         | 33.5  | % |                   | $ | 273,465 |         |  | 30.6  | %
|Commercial loans                |  |                    | 215,527 |   |         | 23.6  | % |                   |   | 217,136 |         |  | 24.4  | %
|Leases (net of unearned income) |  |                    | 115,007 |   |         | 12.6  | % |                   |   | 131,300 |         |  | 14.7  | %
|Indirect loans                  |  |                    | 185,377 |   |         | 20.3  | % |                   |   | 176,115 |         |  | 19.7  | %
|Other consumer loans            |  |                    | 90,877  |   |         | 10.0  | % |                   |   | 94,246  |         |  | 10.6  | %
|                                |  |                    |         |   |         |       |   |                   |   |         |         |  |       |  
|Total loans & leases            |  | $                  | 912,090 |   |         | 100.0 | % |                   | $ | 892,262 |         |  | 100.0 | %
|                                |  |                    |         |   |         |       |   |                   |   |         |         |  |       |  
|Net deferred loan costs         |  |                    | 3,940   |   |         |       |   |                   |   | 3,271   |         |  |       |  
|Allowance for credit losses     |  |                    | (8,875  | ) |         |       |   |                   |   | (8,426  | )       |  |       |  
|                                |  |                    |         |   |         |       |   |                   |   |         |         |  |       |  
|Net loans and leases            |  | $                  | 907,155 |   |         |       |   |                   | $ | 887,107 |         |  |       |  
|                                |  |                    |         |   |         |       |   |                   |   |         |         |  |       |  

Deposits

Total deposits increased $16.9 million in the third quarter and were $945.4 million at September 30, 2008, compared with $928.5 million and $945.2 million at June 30, 2008 and December 31, 2007, respectively. Money market
accounts increased $33.0 million in the third quarter driven by a seasonal increase in municipal deposits and new municipal deposit relationships established during the quarter. Time deposits decreased $14.0 million in the third quarter as the
Company elected to not renew $15.3 million of wholesale brokered deposits that had matured in the quarter. The Companys retail and commercial deposit base continues to perform well, with aggregate balance increases of $5.5 million in the third
quarter.

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



|                      |  |                    |         |            |                   |           |  |       |         |         |   |         |        |       |            |  |           |         |       |   |         |  |   |         |  |   |         |  |       |  
|--------------------- |  | ------------------ | ------- | ---------- | ----------------- | --------- |  | ----- | ------- | ------- | - | ------- | ------ | ----- | ---------- |  | --------- | ------- | ----- | - | ------- |  | - | ------- |  | - | ------- |  | ----- | -
|                      |  | September 30, 2008 |         |            | December 31, 2007 |          
|                      |  | Retail             |         | Commercial |                   | Municipal |  | Total |         | Percent |   |         | Retail |       | Commercial |  | Municipal |         | Total |   | Percent | 
|Non-interest checking |  | $                  | 34,557  |            | $                 | 97,498    |  | $     | 3,304   |         | $ | 135,359 |        | 14.3  | %          |  | $         | 35,133  |       | $ | 100,598 |  | $ | 2,960   |  | $ | 138,691 |  | 14.6  | %
|Interest checking     |  |                    | 80,519  |            |                   | 12,467    |  |       | 18,418  |         |   | 111,404 |        | 11.8  | %          |  |           | 77,368  |       |   | 9,636   |  |   | 14,789  |  |   | 101,793 |  | 10.8  | %
|                      |  |                    |         |            |                   |           |  |       |         |         |   |         |        |       |            |  |           |         |       |   |         |  |   |         |  |   |         |  |       |  
|Total checking        |  |                    | 115,076 |            |                   | 109,965   |  |       | 21,722  |         |   | 246,763 |        | 26.1  | %          |  |           | 112,501 |       |   | 110,234 |  |   | 17,749  |  |   | 240,484 |  | 25.4  | %
|Savings               |  |                    | 76,013  |            |                   | 7,636     |  |       | 2,770   |         |   | 86,419  |        | 9.1   | %          |  |           | 74,283  |       |   | 6,498   |  |   | 1,545   |  |   | 82,326  |  | 8.7   | %
|Money market          |  |                    | 75,225  |            |                   | 47,625    |  |       | 121,094 |         |   | 243,944 |        | 25.8  | %          |  |           | 70,684  |       |   | 43,565  |  |   | 88,825  |  |   | 203,074 |  | 21.5  | %
|Time deposits         |  |                    | 311,251 |            |                   | 19,043    |  |       | 37,989  |         |   | 368,283 |        | 39.0  | %          |  |           | 352,760 |       |   | 22,897  |  |   | 43,689  |  |   | 419,346 |  | 44.4  | %
|                      |  |                    |         |            |                   |           |  |       |         |         |   |         |        |       |            |  |           |         |       |   |         |  |   |         |  |   |         |  |       |  
|Total deposits        |  | $                  | 577,565 |            | $                 | 184,269   |  | $     | 183,575 |         | $ | 945,409 |        | 100.0 | %          |  | $         | 610,228 |       | $ | 183,194 |  | $ | 151,808 |  | $ | 945,230 |  | 100.0 | %
|                      |  |                    |         |            |                   |           |  |       |         |         |   |         |        |       |            |  |           |         |       |   |         |  |   |         |  |   |         |  |       |  

Liquidity

The
Company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 the
company. Funding loan and lease requests, providing for liability outflows, 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 and borrowings. 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 the Bank is responsible for
implementing the policies and guidelines for the maintenance of prudent levels of liquidity. Management believes that, as of September 30, 2008, liquidity as measured by the Bank is in compliance with its policy guidelines.

The Banks principal sources of funds for operations are cash flows generated from earnings, deposits, loan and lease repayments, borrowings from the Federal Home
Loan Bank of New York (FHLB), and securities sold under repurchase agreements. During the



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##### Table of Contents

nine months ended September 30, 2008, cash and cash equivalents decreased by $2.1 million, as net cash used in investing activities of $64.7 million
exceeded net cash provided by operating and financing activities of $62.6 million. Net cash used in investing activities primarily resulted from the net increase in loans of $35.0 million and securities purchases exceeding maturities, sales and
principal repayments by $19.7 million. The net cash provided by financing activities principally reflects a $42.2 million net increase in borrowings, partly reduced by cash dividends of $3.4 million, purchase of shares for the directors
deferred stock-based plan of $2.0 million and treasury share purchases of $3.4 million in the nine months ended September 30, 2008. Net cash from operating activities was primarily provided by net income in the amount of $8.0 million and
proceeds from sale of loans and leases held-for-sale of $23.5 million, partly reduced by originations of loans held-for-sale of $9.6 million.

As a member
of the FHLB, the Bank is eligible to borrow up to an established credit limit against certain residential mortgage loans and investment securities that have been pledged as collateral. As of September 30, 2008, the Banks credit limit with
the FHLB was $258.7 million. The total of the Banks outstanding borrowings from the FHLB on that date was $203.6 million.

Capital Resources

During the nine months ended September 30, 2008, shareholders equity decreased $358,000. Net income of $8.0 million was offset by dividends
declared totaling $3.4 million ($0.74 per share) and treasury stock purchased of $3.4 million. The Company continued its stock repurchase program in the first nine months of 2008 with the purchase of 143,900 shares of its stock for average cost of
the shares repurchased of $23.84 per share including a privately negotiated stock purchase of 52,500 shares during the third quarter. In addition, accumulated other comprehensive income decreased $1.3 million due to a decrease in unrealized gains on
securities available-for-sale due primarily to changes in market conditions and interest rates. The securities available-for-sale portfolio is predominantly comprised of investment grade mortgage-backed securities, securities issued by U.S.
government-sponsored enterprises and municipal securities. Our mortgage-backed securities portfolio is comprised of pass-through securities guaranteed by either Fannie Mae, Freddie Mac or Ginnie Mae and are backed by conventional residential
mortgages. Our mortgage-based securities portfolio does not include any securities backed by sub-prime, Alt-A or other high-risk mortgages.

On
October 14, 2008, the U.S. Treasury announced a voluntary Capital Purchase Program (CPP) to encourage U.S. financial institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to support the
U.S. economy. The CPP is an element of the Treasury Departments broad set of actions which are intended to infuse equity in healthy financial institutions that form the backbone of the U.S. financial system.

Under the CPP, as announced, Treasury will purchase up to $250 billion of senior preferred shares on standardized terms. The CPP is available to qualifying U.S.
controlled banks, savings associations, and certain bank and savings and loan holding companies engaged only in financial activities that elect to participate within the prescribed time frame. The minimum subscription amount available to a
participating institution is 1 percent of risk-weighted assets. The maximum subscription amount is the lesser of $25 billion or 3 percent of risk-weighted assets. The CPP provides that the Treasury intends to fund the senior preferred shares
purchased under the program by year-end 2008. In conjunction with the purchase of senior preferred shares, Treasury will receive warrants to purchase common stock with an aggregate market price equal to 15 percent of the senior preferred
investment. Capital raised under the CPP qualifies as Tier I for regulatory capital purposes.

The Company has the necessary preferred stock available and
has applied for the maximum subscription amount, or approximately $26.9 million.

On March 11, 2005, the Federal Reserve Board (FRB) announced
approval of its final rule that allows the continued inclusion of outstanding and prospective issuances of trust preferred securities in the Tier 1 capital of bank holding companies. Under the final rule, bank holding companies may continue to treat
trust preferred securities as Tier 1 capital up to the current 25% core capital limit until March 31, 2009. After March 31, 2009, the 25% limit will be calculated net of goodwill (net of any associated deferred tax liability).

The Company 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



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regulators that, if undertaken, could have a direct material effect on the Companys financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Companys assets, liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Companys 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 the Company and its subsidiary bank to maintain minimum amounts and ratios (set forth in the following tables) of total and Tier 1 Capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1
Capital (as defined) to average assets (as defined).

As of December 31, 2007, the most recent notification from the Office of the Comptroller of the
Currency categorized the Bank as well-capitalized, under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the tables below. Management believes that, as of September 30, 2008, the Company and the Bank met all capital adequacy requirements to which they were subject.

The following table compares the Company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                 |         |       | To be WellCapitalized UnderPrompt CorrectiveAction Provisions |  
|                                         |  | Amount                 |         | Ratio |                                                               |   | Amount |   | Ratio  | 
|                                         |  | (Dollars in thousands) |        
|As of September 30, 2008                 |  |                        |         |       |                                                               |   |        |   |        |  |   |       |  
|Total Capital (to risk-weighted assets)  |  | $                      | 105,088 |       | 11.71                                                         | % |        | $ | 89,699 |  | 3 | 10.00 | %
|Tier I Capital (to risk-weighted assets) |  |                        | 96,213  |       | 10.72                                                         | % |        |   | 53,819 |  | 3 | 6.00  | %
|Tier I Capital (to average assets)       |  |                        | 96,213  |       | 7.58                                                          | % |        |   | 63,347 |  | 3 | 5.00  | %
|                                         |  |                        |         |      
|As of December 31, 2007                  |  |                        |         |       |                                                               |   |        |   |        |  |   |       |  
|Total Capital (to risk-weighted assets)  |  | $                      | 102,311 |       | 11.59                                                         | % |        | $ | 88,262 |  | 3 | 10.00 | %
|Tier I Capital (to risk-weighted assets) |  |                        | 93,885  |       | 10.64                                                         | % |        |   | 52,957 |  | 3 | 6.00  | %
|Tier I Capital (to average assets)       |  |                        | 93,885  |       | 7.53                                                          | % |        |   | 62,373 |  | 3 | 5.00  | %

Application of Critical Accounting Estimates

The Companys consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow 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. Certain policies inherently have a greater reliance on the use of estimates,
assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be
recorded at fair value or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and information used
to record valuation adjustments for certain assets and liabilities are based on quoted market prices or are provided by other third-party sources, when available. When third party information is not available, valuation adjustments are estimated in
good faith by management.

The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial
statements included in the 2007 Annual Report on Form 10-K (the Consolidated Financial Statements). These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information
on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and
estimates underlying those amounts, management has identified the determination of the allowance for loan and lease losses, accrued income taxes, and the fair value analysis of the intangible asset 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.



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The allowance for credit losses represents managements estimate of probable credit losses in the loan and lease
portfolio. Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on
impaired loans and leases, estimated losses on pools of homogeneous loans and leases based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan
and lease portfolio also represents the largest asset type on the consolidated balance sheet. Note 1 to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q describes the methodology used to determine the allowance for credit
losses, and a discussion of the factors driving changes in the amount of the allowance for credit losses is included in this report.

The Company accounts
for income taxes using the asset and liability approach. Under this approach, deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Companys assets and
liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when such amounts are realized or settled. The Company must assess the likelihood that a portion or all of the deferred tax assets will
not be realized. In doing so, judgments and estimates must be made regarding the projection of future taxable income. If necessary, a valuation allowance is established to reduce the deferred tax assets to the amount that is more likely than not to
be realized.

In computing the income tax provision, estimates and assumptions must be made regarding the deductibility of certain expenses. It is possible
that these estimates and assumptions may be disallowed as part of an examination by the various taxing authorities that we are subject to, resulting in additional income tax expense in future periods. In addition, we maintain a reserve related to
uncertain tax positions. These uncertain tax positions are evaluated each reporting period to determine the level of reserve that is appropriate.

The
Company utilizes significance estimates and assumptions in determining the fair value of its intangible assets for purposes of impairment testing. The valuation requires the use of assumptions, including among others, discount rates, rates of return
on assets, account attrition and costs of servicing.

Other Information

The long-standing Oneida Indian litigation, in which the Oneida Indian nation seeks possession of land in Madison and Oneida Counties, is described in the Companys Form 10-K for the fiscal year ended
December 31, 2007. On May 21, 2007, the U.S. District Court issued a decision dismissing the possessory land claims. The Courts decision has been appealed. Management continues to believe that this matter will be resolved without
adversely affecting the Company.

New Accounting Pronouncements

The FAS issued FASB Staff Position (FSP) FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13, and FSP FAS 157-2, Effective Date of FASB Statement No. 157. FSP FAS 157-1 excludes certain leasing transactions accounted for under FASB Statement No. 13,
Accounting for Leases, from the scope of Statement 157. FSP FAS 157-2 defers the effective date in FASB Statement No. 157, Fair Value Measurements, for one year (January 1, 2009 for the Company) for certain nonfinancial
assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is currently evaluating the impact this will have on the
Companys current practice of measuring fair value for these assets and does not anticipate a material effect on the financial statements.

In
December 2007, the FASB issued FASB Statement No. 141 (Revised 2007) Business Combinations. Statement 141R will significantly change the accounting for business combinations. Under Statement 141R, an acquiring entity will be
required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. Statement 141R also includes a substantial number of new disclosure requirements. The Company will be
required to apply Statement 141R to any business acquisitions completed on or after January 1, 2009.



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|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

Qualitative Analysis. 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 rates. Interest
rate risk is the primary market risk faced by the Company as other types of market risk do not arise in the normal course of our business activities.

ALCO
is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk. The policies and guidelines established by ALCO are reviewed and approved by the Companys Board
of Directors. The primary tool used to assess our interest rate sensitivity is the income simulation model.

Quantitative Analysis. Net Interest Income is
affected by changes in the absolute level of interest rates and by changes in the shape of the yield curve. The model requires management to make assumptions about how the Banks balance sheet is likely to evolve through time in different rate
scenarios. The model assumes loan prepayment rates, reinvestment rates and deposit decay rates based on historical experiences and current conditions. These assumptions change based on the varying rate scenarios.

The following table sets forth the results of our net interest income simulation model as of September 30, 2008.



|                                        |  |                                             
|--------------------------------------- |  | --------------------------------------------
|Change in Interest Rates (basis points) |  | Percent change in annual Net Interest Income
|+200bp                                  |  | (4.0)%                                      
|-100bp                                  |  | (1.7)%                                      

The modeled net interest income reflects a gradual increase/decrease in rates over 12 months from a flat rate
scenario. The results of the income simulation show the change in net interest income that is well within the internal policy limit. The Banks guideline for risk management calls for preventative measures to be taken if simulation indicates
net interest income would be adversely affected by more than 15%.

The net interest income table presented assumes that the composition of our interest
sensitive assets and liabilities existing at the beginning of the period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the
duration to maturity or repricing of specific assets and liabilities. Moreover, modeling changes require the making of assumptions set forth above that may or may not reflect the manner in which actual yields and costs respond to changes in market
interest rates. Although the net interest income table provides an indication of our interest rate risk exposure at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effect of changes in
market interest rates on our net interest income and will differ from actual results.



|Item 4. | Controls and Procedures
|------- | -----------------------

The management of the Company is
responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of September 30, 2008, an evaluation was performed under the
supervision of and with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures. Based on that evaluation, the CEO and
the CFO concluded that the Companys disclosure controls and procedures as of September 30, 2008 were effective.

There has been no change in the
Companys internal control over financial reporting that occurred during the most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



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##### Table of Contents

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

Not applicable.



|Item 1A | Risk Factors
|------- | ------------

There are no material changes in the
risk factors disclosed in the Companys 2007 Annual Report on Form 10-K for the fiscal year ended December 31, 2007.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------



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



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



| | c) | The table below sets forth the information with respect to purchases made by the Company of our common stock during the quarter ended September 30, 2008:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



|                 |  |                                |  |                             |       |                                                                  |       |                                                                    |  
|---------------- |  | ------------------------------ |  | --------------------------- | ----- | ---------------------------------------------------------------- | ----- | ------------------------------------------------------------------ | -
|Period           |  | Total Numberof SharesPurchased |  | Average PricePaid Per Share |       | Total Number ofShares Purchasedas Part of PubliclyAnnounced Plan |       | Maximum Numberof Shares that MayYet be PurchasedUnder the Plan (1)
|7/1/08  7/31/08 |  | 4,300                          |  | $                           | 21.97 |                                                                  | 4,300 |                                                                    | 
|8/1/08  8/31/08 |  |                               |  | $                           |      |                                                                  |      |                                                                    | 
|9/1/08  9/30/08 |  | 52,500                         |  | $                           | 21.04 |                                                                  |      |                                                                    | 
|                 |  |                                |  |                             |       |                                                                  |       |                                                                    |  
|Total            |  | 56,800                         |  | $                           | 21.11 |                                                                  | 4,300 |                                                                    |  
|                 |  |                                |  |                             |       |                                                                  |       |                                                                    |  



|(1) | On November 27, 2007, the Company announced that its Board of Directors had authorized the repurchase of up to 3% of the Companys outstanding common stock, or
approximately 143,500 shares, over a 12-month period. The preceding table provides information with respect to repurchases of the Companys common stock during the third quarter ended September 30, 2008. The 4,300 shares purchased in July
completed the repurchase plan. The additional 52,500 shares were purchased in a privately negotiated transaction.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

Not applicable.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

Not applicable



|Item 5. | Other Information
|------- | -----------------

Not applicable



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##### Table of Contents

|Item 6. | Exhibits
|------- | --------

Exhibits required by Item 601 of
Regulation S-K:



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|3.1           |  | Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to exhibit 3.1 to the Companys Registration Statement on Form S-4 (Registration No.
333-62623) filed with the Commission on August 31, 1998, as amended                                                                                                                                                                                                   
|              | 
|3.2           |  | Amended and Restated Bylaws of the Company (incorporated herein by reference to exhibit number 3.2 to the Companys Current Report on Form 8-K (File No. 0-15366) filed with the Commission
on September 3, 2004)                                                                                                                                                                                                                                             
|              | 
|4.1           |  | Rights Agreement dated October 19, 2001 between Alliance Financial Corporation and American Stock Transfer & Trust Company, including the Certificate of Amendment to the company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 the Companys Form 8-A12G filed with the
Commission on October 25, 2001)
|              | 
|10.1          |  | Alliance Financial Corporation Director Retirement Plan dated March 11, 2008 (incorporated herein by reference to exhibit 10.1 to the Companys Current Report on Form 8-K (File No.
000-15366) filed with the Commission on March 14, 2008)                                                                                                                                                                                                                  
|              | 
|10.2          |  | Alliance Bank Executive Incentive Retirement Plan dated March 11, 2008 (incorporated herein by reference to exhibit 10.2 to the Companys Current Report on Form 8-K (File No. 000-15366)
filed with the Commission on March 14, 2008)                                                                                                                                                                                                                        
|              | 
|10.3          |  | Alliance Financial Corporation Stock-Based Deferral Plan dated March 11, 2008 (incorporated herein by reference to exhibit 10.3 to the Companys Current Report on Form 8-K (File No.
000-15366) filed with the Commission on March 14, 2008)                                                                                                                                                                                                                 
|              | 
|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, Treasurer 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, Treasurer 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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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: November 10, 2008 |  | /s/ Jack H. Webb                                                          
|                        |  | Jack H. Webb, Chairman of the Board, President and Chief Executive Officer
|                        | 
|DATE: November 10, 2008 |  | /s/ J. Daniel Mohr                                                        
|                        |  | J. Daniel Mohr, Treasurer and Chief Financial Officer                     



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