Alliance Financial Announces Third Quarter Earnings

             Alliance Financial Announces Third Quarter Earnings

PR Newswire

SYRACUSE, N.Y., Oct. 29, 2012

SYRACUSE, N.Y., Oct. 29, 2012 /PRNewswire/ --Alliance Financial Corporation
("Alliance" or the "Company") (NasdaqGM: ALNC), the holding company for
Alliance Bank, N.A., announced today net income for the quarter ended
September 30, 2012 of $2.3 million or $0.48 per diluted common share, compared
with $3.7 million or $0.77 per diluted common share in the year-ago quarter
and $2.9 million or $0.61 per diluted common share in the second quarter of
2012. Securities gains in the third quarter of 2011, when netted against a
fixed asset write-down, totaled $472,000 after tax or $0.10 per share. Third
quarter results for 2012 included costs associated with the recently announced
acquisition of the Company by NBT Bancorp Inc. ("NBT") of $598,000 after tax
or $0.13 per share.

Net income for the nine months ended September 30, 2012 was $7.8 million or
$1.64 per diluted share, compared with $10.5 million or $2.20 per diluted
share in the first nine months of 2011.

On October 8, NBT and Alliance announced that they entered into a definitive
agreement under which Alliance will merge with and into NBT. The merger is
valued at approximately $233.4 million and is expected to close inearly 2013
subject to customary closing conditions, including receipt of regulatory
approvals and approvals by NBT and Alliance stockholders. Under the terms of
the merger agreement, each outstanding share of Alliance common stock will be
converted into the right to receive 2.1779 shares of NBT common stock upon
completion of the merger.The transaction is valued at $48.00 per Alliance
share based on NBT's average closing stock price of $22.04 for the five-day
trading period ending on October5, 2012.

Jack H. Webb, President and CEO of Alliance said, "Throughout the first nine
months of this year, our core business units have effectively executed our
organic growth strategy resulting in increased originations in all of our
business lines in 2012."

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

Balance Sheet Highlights
Total assets were $1.4 billion at September 30, 2012, which was an increase of
$23.2 million from June 30, 2012. Total loans and leases (net of unearned
income) increased $7.9 million from the previous quarter to $906.4 million at
September 30, 2012.

Loan origination volumes in the third quarter increased $27.0 million, or 45%,
to $86.5 million, compared with $59.5 million in the year-ago quarter on
increased demand in each of our commercial, residential mortgage and indirect
lending businesses. 

Commercial loans and mortgages decreased $8.6 million in the third quarter and
totaled $274.5 million at September 30, 2012, as a $4.9 million decrease in
existing lines of credit offset a solid quarter of new loan production.
Originations of commercial loans and mortgages in the third quarter (excluding
lines of credit) totaled $12.5 million, compared with $10.3 million in the
year-ago quarter.

Residential mortgages outstanding increased $6.6 million in the third quarter
to $327.5 million. Originations of residential mortgages totaled $38.9
million in the third quarter of 2012, compared with $30.5 million in the
year-ago quarter. Alliance retained in portfolio approximately $17.7 million
of the third quarter originations that were bi-weekly payment mortgages or
monthly payment mortgages with maturities of 15 years or less.

Indirect auto loan balances were $199.4 million at the end of the third
quarter, which was an increase of $10.7 million from the end of the second
quarter of 2012. Alliance originated $33.7 million of indirect auto loans in
the third quarter, compared with $17.9 million in the year-ago quarter. The
increase in originations this year is attributable to a change in the
Company's rate structure designed to increase its market share without
lowering its underwriting standards, along with the implementation of an
electronic application system. Alliance 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 employed in its direct lending programs.

The Company's investment securities portfolio totaled $343.2 million at
September 30, 2012 which was unchanged from June 30, 2012. The Company's
portfolio is comprised entirely of investment grade securities, the majority
of which are rated "AAA" by one or more of the nationally recognized rating
agencies. The breakdown of the securities portfolio at September 30, 2012 was
77.1% government-sponsored entity-guaranteed mortgage-backed securities, 21.5%
municipal securities and 0.4% obligations of U.S. government-sponsored
corporations. Mortgage-backed securities, which totaled $264.6 million at
September 30, 2012, are comprised primarily of pass-through securities backed
by conventional residential mortgages and guaranteed by Fannie-Mae,
Freddie-Mac or Ginnie Mae, which in turn are backed by the U.S. government.
The Company's municipal securities portfolio, which totaled $74.0 million at
the end of the third quarter, is primarily comprised of highly rated general
obligation bonds issued by local municipalities in New York State. Net
unrealized gains on our securities portfolio totaled $12.4 million at the end
of the third quarter.

Deposits increased $19.8 million in the third quarter, and were $1.1 billion
at September 30, 2012. Low-cost transaction accounts comprised 77.1% of total
deposits at the end of the third quarter, compared with 75.7% at June 30,
2012. Alliance's liability mix remained favorably weighted towards transaction
accounts in the third quarter as retail and municipal depositors continue to
prefer transaction accounts over time accounts in the low interest rate
environment, and also because of the buildup of cash on commercial customers'
balance sheets.

Shareholders' equity was $148.4 million at September 30, 2012, compared with
$146.8 million at the end of the second quarter. Net income for the quarter
increased shareholders' equity by $2.3 million and was partially offset by
common stock dividends declared of $1.5 million or $0.32 per common share.

The Company's Tier 1 leverage ratio was 9.43% and its total risk-based capital
ratio was 15.79% at the end of the third quarter. The Company's tangible
common equity capital ratio (a non-GAAP financial measure) was 7.85% at
September 30, 2012.

Asset Quality and the Provision for Credit Losses
Delinquent loans and leases (including non-performing) totaled $10.1 million
at September 30, 2012, compared with $12.6 million at June 30, 2012 and $17.0
million at December 31, 2011. The largest decline in delinquent loans in the
third quarter occurred in loans delinquent 90 days or more or on non-accrual
status, which declined $2.6 million or 38.4%. 

Non-performing assets were $5.1 million or 0.35% of total assets at September
30, 2012, compared with $6.7 million or 0.47% of total assets at June 30, 2012
and $11.7 million or 0.83% of total assets at December 31, 2011. The decline
in non-performing assets in the third quarter resulted primarily from
non-accrual loans returning to accrual status as a result of satisfactory
payment performance, charge-offs and pay-offs of non-performing loans.
Included in non-performing assets at the end of the third quarter are
non-performing loans and leases totaling $4.1 million, compared with $6.7
million at June 30, 2012 and $11.3 million at December 31, 2011.

Conventional residential mortgages comprised $2.3 million (37 loans) or 56.1%
of non-performing loans and leases, and commercial loans and mortgages totaled
$1.1 million (17 loans) or 26.4% of non-performing loans and leases at the end
of the third quarter.

Net charge-offs were $409,000 and $2.0 million in the three and nine months
ended September 30, 2012, respectively, compared with $139,000 and $499,000 in
the year-ago periods. Charge-offs for the third quarter included a $365,000
write down of a $1.3 million commercial relationship to the real estate
collateral's estimated fair value, which was foreclosed on and transferred to
other real estate owned in the third quarter. This commercial relationship
was placed on non-performing status in the third quarter of 2011, with a total
outstanding balance at that time of $3.6 million. As was previously disclosed
in the Company's 2011 Form 10-K and quarterly reports on Form 10-Q, the
Company recorded write-downs on this relationship totaling $2.3 million
between the fourth quarter of 2011 and the second quarter of 2012. Net
charge-offs annualized equaled 0.18% and 0.30%, respectively, of average loans
and leases during the three months and nine months ended September 30, 2012,
compared with 0.06% and 0.08% in the year-ago periods, respectively. Gross
charge-offs were $621,000 and recoveries were $212,000 in the third quarter of
2012. 

No provision for credit losses was recorded in the third quarter compared to a
negative provision expense of $300,000 in the second quarter, and provision
expense of $750,000 in the year-ago quarter. Alliance assesses a number of
quantitative and qualitative factors at the individual portfolio level in
determining the adequacy of the allowance for credit losses and the required
provision expense each quarter. In addition, Alliance analyzes certain
broader, non-portfolio specific factors in assessing the adequacy of the
allowance for credit losses, such as the allowance as a percentage of total
loans and leases, the allowance as a percentage of non-performing loans and
leases and the provision expense as a percentage of net charge-offs. In doing
so, a portion of the allowance has been considered "unallocated", which means
it is not based on either quantitative or qualitative factors, but on the
broader, non-portfolio specific factors mentioned above. At September 30,
2012, $698,000 or 8.2% of the allowance for credit losses was considered to be
"unallocated," compared to $991,000 or 9% at December 31, 2011. Consistent
with the improvement in the Company's asset quality metrics and net charge-off
levels in recent quarters (excluding the charge-offs related to the $3.6
million commercial relationship discussed above), the relative level of
unallocated allowance to the total allowance has trended downward each quarter
in 2012. Absent any material deterioration in credit quality or material
growth in the loan and lease portfolio, some portion of this "unallocated"
allowance may be reduced by future probable credit losses, which would have
the effect of lowering the amount of provision expense relative to net
charge-offs compared with past quarters, which was the case in the third
quarter of 2012.

The provision for credit losses as a percentage of net charge-offs was 0% in
the third quarter compared with 540% in the year-ago quarter. The provision
for credit losses as a percentage of net charge-offs was not meaningful in the
second quarter of 2012 due to the negative provision that was recorded in that
quarter. The high level of provision as a percentage of net charge-offs in the
third quarter of 2011 resulted primarily from the establishment of an
impairment allowance on the $3.6 million commercial relationship previously
discussed.

The allowance for credit losses was $8.5 million at September 30, 2012,
compared with $8.9 million at June 30, 2012 and $10.8 million at December 31,
2011. The ratio of the allowance for credit losses to total loans and leases
was 0.94% at September 30, 2012, compared with 0.99% at June 30, 2012 and
1.24% at December 31, 2011. The ratio of the allowance for credit losses to
non-performing loans and leases was 207% at September 30, 2012, compared with
134% at June 30, 2012 and 96% at December 31, 2011.

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

The net interest margin on a tax-equivalent basis was 3.23% in the third
quarter of 2012, compared with 3.48% in the year-ago quarter and 3.26% in the
second quarter of 2012. The decrease in the net interest margin compared with
the third quarter of 2011 was the result of a decrease in the tax-equivalent
earning asset yield of 55 basis points in the third quarter compared with the
year-ago quarter, which was partially offset by a decrease in the cost of
interest-bearing liabilities of 33 basis points over the same period. On a
linked-quarter basis, the decline in our earning-assets yield was 9 basis
points in the third quarter, which was offset by a 6 basis point drop in the
cost of our interest-bearing liabilities.

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

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

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

Net interest margin is expected to remain under pressure in coming quarters as
the persistently low interest rate environment continues to negatively affect
the return on loan and investment portfolios, while the ability to further
reduce funding costs is limited.

Non-Interest Income and Non-Interest Expenses
Non-interest income was $4.6 million in the third quarter of 2012, compared
with $5.9 million in the third quarter of 2011 and $4.5 million in the second
quarter of 2012. The Company did not sell securities in the third quarter of
2012 and therefore gains on sales of investment securities decreased $1.3
million compared with the third quarter of 2011. Gains on the sale of loans
were $263,000 higher than the third quarter of 2011 due to higher volumes of
mortgages originated and sold in 2012.

Non-interest income totaled $13.6 million in the first nine months of 2012,
compared with $14.9 million for the same period in the prior year. The $1.4
million decrease from the prior year period resulted from the decrease in
gains on sales of securities and other non-interest income partly offset by a
$593,000 increase in gains on the sale of loans.

Non-interest income (excluding gains on securities sales) accounted for 31.5%
of total revenue in the third quarter of 2012, compared with 29.5% in the
year-ago quarter. Non-interest income (excluding gains on securities sales)
accounted for 31.3% of total revenue in the first nine months of 2012,
compared with 29.0% in the year-ago period.

Non-interest expenses were $11.7 million in the quarter ended September 30,
2012, compared with $11.1 million in the year-ago quarter and $11.0 million in
the second quarter of 2012. Merger related costs (pre-tax) of $991,000 were
accrued in the third quarter and are included in professional fees. Other
operating expenses in the third quarter of 2011 included a $555,000 write-down
of a vacant bank-owned building to its estimated fair value. Non-interest
expenses were $33.6 million in the nine months ended September 30, 2012,
compared with $32.9 million in the first nine months of 2011.

The Company's efficiency ratio was 80.6% in the third quarter of 2012,
compared with 71.5% in the year-ago quarter. The Company's efficiency ratio
was 77.5% in the nine months ended September 30, 2012, compared with 70.2% in
the year-ago period. Excluding the merger related costs, the efficiency ratio
was 73.8% and 75.2%, respectively, for the three and nine month period ending
September 30, 2012. Excluding the fixed asset write-down, the efficiency ratio
was 67.9% and 69.1%, respectively, for the three and nine month period ending
September 30, 2011.

The Company's effective tax rate was 19.1% and 22.1% for the three and nine
months ended September 30, 2012, respectively, compared with 27.1% and 26.3%
in the year-ago periods, respectively. The decrease in our effective tax rate
from 2011 was due to a higher level of tax-exempt income as a percentage to
total taxable income.

About Alliance Financial Corporation
Alliance Financial Corporation is a financial holding company with Alliance
Bank, N.A. as its principal subsidiary that provides retail, commercial and
municipal banking, and trust and investment services through 29 offices in
Cortland, Madison, Oneida, Onondaga and Oswego counties. Alliance also
operates an investment management administration center in Buffalo, N.Y. and
an equipment lease financing company, Alliance Leasing, Inc.

Forward-Looking Statements
This press release contains certain forward-looking statements with respect to
the financial condition, results of operations and business of Alliance
Financial Corporation. 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 pressure in
the banking industry; changes in the interest rate environment which may
affect the net interest margin; changes in the regulatory environment; general
economic conditions, either nationally or regionally, resulting, among other
things, in a deterioration in credit quality; changes in business conditions
and inflation; changes in the securities markets; changes in technology used
in the banking business; our ability to maintain and increase market share and
control expenses; increases in FDIC insurance premiums may cause earnings to
decrease; and other risks set forth under the caption "Risk Factors" in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2011, and in subsequent filings with the Securities and Exchange Commission.

Contact: Alliance Financial Corporation
         J. Daniel Mohr, Executive Vice President and
         CFO
         (315) 475-4478



Alliance Financial Corporation

Consolidated Statements of Income (Unaudited)
                       Three months ended            Nine months ended

                       September 30,                 September 30,
                       2012           2011           2012           2011
                       (Dollars in thousands, except share and per share data)
Interest income:
Loans, including fees  $9,727         $10,448        $29,270        $31,731
Federal funds sold
and interest bearing   28             —              103            5
deposits
Securities             2,224          3,613          7,286          11,081
Total interest income  11,979         14,061         36,659         42,817
Interest expense:
Deposits:
 Savings accounts     30             54             85             166
 Money market         249            377            779            1,271
accounts
 Time accounts        812            1,404          2,843          4,337
 NOW accounts         30             49             96             179
Total                  1,121          1,884          3,803          5,953
Borrowings:
 Repurchase           210            206            622            619
agreements
 FHLB advances        524            816            1,920          2,486
 Junior subordinated  170            158            514            473
obligations
Total interest         2,025          3,064          6,859          9,531
expense
Net interest income    9,954          10,997         29,800         33,286
Provision for credit   —              750            (300)          1,110
losses
Net interest income
after provision for    9,954          10,247         30,100         32,176
credit losses
Non-interest income:
Investment management  1,831          1,948          5,636          5,850
income
Service charges on     1,074          1,194          3,167          3,299
deposit accounts
Card-related fees      688            687            2,059          2,039
Income from
bank-owned life        250            258            742            769
insurance
Gain on the sale of    508            245            1,214          621
loans
Gain on the sale of    —              1,325          —              1,325
securities
Other non-interest     233            262            767            1,037
income
Total non-interest     4,584          5,919          13,585         14,940
income
Non-interest expense:
Salaries and employee  5,761          5,573          17,103         16,407
benefits
Occupancy and          1,770          1,833          5,365          5,479
equipment expense
Communication expense  153            124            469            448
Office supplies and   298            283            905            868
postage expense
Marketing expense      152            193            651            673
Amortization of        222            241            665            722
intangible asset
Professional fees      1,615          736            3,220          2,420
FDIC insurance         216            49             642            844
premium
Other operating        1,526          2,107          4,598          5,080
expense
Total non-interest     11,713         11,139         33,618         32,941
expense
Income before income   2,825          5,027          10,067         14,175
tax expense
Income tax expense     540            1,360          2,224          3,723
Net income             $2,285         $3,667         $7,843         $10,452
Share and Per Share
Data
Basic average common   4,702,294      4,667,355      4,700,624      4,664,070
shares outstanding
Diluted average
common shares          4,702,294      4,673,908      4,700,624      4,671,688
outstanding
Basic earnings per     $ 0.48        $ 0.77        $ 1.64        $ 2.20
common share
Diluted earnings per   $ 0.48        $ 0.77        $ 1.64        $ 2.20
common share
Cash dividends         $ 0.32        $ 0.31        $ 0.94        $ 0.91
declared



Alliance Financial Corporation

Consolidated Balance Sheets (Unaudited)
                                   September 30, 2012      December 31, 2011
                                   (Dollars in thousands, except share and per
                                   share data)
Assets
Cash and due from banks            $   88,703            $   52,802
Securities available-for-sale      343,211                 374,306
Federal Home Loan Bank of NY
("FHLB") Stock and
                                   7,983                   8,478
 Federal Reserve Bank ("FRB")
Stock
Loans and leases held for sale     359                     1,217
Total loans and leases, net of     906,383                 872,721
unearned income
Less allowance for credit losses   (8,483)                 (10,769)
Net loans and leases               897,900                 861,952
Premises and equipment, net        16,879                  17,541
Accrued interest receivable        4,134                   3,960
Bank-owned life insurance          30,172                  29,430
Goodwill                           30,844                  30,844
Intangible assets, net             7,029                   7,694
Other assets                       18,826                  20,866
Total assets                       $1,446,040              $1,409,090
Liabilities and shareholders'
equity
Liabilities:
Deposits:
 Non-interest bearing           $  212,437             $  185,736
 Interest bearing               913,966                 897,329
Total deposits                     1,126,403               1,083,065
Borrowings                         127,134                 136,310
Accrued interest payable           723                     1,578
Other liabilities                  17,628                  18,366
Junior subordinated obligations
issued to
                                   25,774                  25,774
 unconsolidated subsidiary
trusts
Total liabilities                  1,297,662               1,265,093
Shareholders' equity:
Common stock                       5,104                   5,092
Surplus                            47,651                  47,147
Undivided profits                  103,225                 99,879
Accumulated other comprehensive    4,808                   3,951
income
Directors' stock-based deferred    (3,754)                 (3,416)
compensation plan
Treasury stock                     (8,656)                 (8,656)
Total shareholders' equity         148,378                 143,997
Total liabilities and              $1,446,040              $1,409,090
shareholders' equity
Common shares outstanding          4,782,185               4,769,241
Book value per common share        $31.03                  $30.19
Tangible book value per common     $23.11                  $22.11
share



Alliance Financial Corporation

Consolidated Average Balances (Unaudited)
                         Three months ended        Nine months ended September
                                                   30,
                         September 30,
                         2012         2011         2012           2011
                         (Dollars in thousands)
Earning assets:
Federal funds sold and
interest bearing         $  50,376  $   3,311  $  58,175    $   8,124
deposits
Securities^(1)           338,102      444,208      347,000        447,467
Loans and leases
receivable:
 Residential real      325,720      331,977      319,769        331,727
estate loans^(2)
 Commercial loans      146,208      134,508      145,993        130,540
 Commercial real       128,719      120,059      127,336        118,615
estate loans
 Leases, net of        12,391       30,990       16,854         35,255
unearned income^(2)
 Indirect loans        194,717      162,439      179,188        167,649
 Other consumer loans  88,522       91,087       88,608         90,596
Loans and leases
receivable, net of       896,277      871,060      877,748        874,382
unearned income
Total earning assets     1,284,755    1,318,579    1,282,923      1,329,973
Non-earning assets       138,176      132,081      136,870        129,827
Total assets             $1,422,931   $1,450,660   $1,419,793     $1,459,800
Interest bearing
liabilities:
Interest bearing         $155,062     $  139,035  $  152,660    $  148,445
checking accounts
Savings accounts         117,732      108,969      113,275        106,527
Money market accounts    358,951      346,779      363,154        368,670
Time deposits            263,632      332,054      276,668        337,480
Borrowings               127,210      160,943      128,820        145,895
Junior subordinated
obligations issued to
unconsolidated           25,774       25,774       25,774         25,774

 trusts
Total interest bearing   1,048,361    1,113,554    1,060,351      1,132,791
liabilities
Non-interest bearing     213,883      183,920      200,399        178,124
deposits
Other non-interest       16,083       15,957       16,545         15,814
bearing liabilities
Total liabilities        1,278,327    1,313,431    1,277,295      1,326,729
Shareholders' equity     144,604      137,229      142,498        133,071
Total liabilities and    $1,422,931   $1,450,660   $1,419,793     $1,459,800
shareholders' equity

 (1) The amounts shown are amortized cost and include FHLB and FRB stock
 (2) Includes loans and leases held for sale



Alliance Financial Corporation

Investments, Loans and Leases, and Deposits (Unaudited)
The following table sets forth the amortized cost and fair value of the Company's
available-for-sale securities portfolio:
                    September 30, 2012   June 30, 2012        December 31, 2011
                    Amortized  Fair      Amortized  Fair      Amortized  Fair
                    Cost       Value
                                         Cost       Value     Cost       Value
Securities          (Dollars in thousands)
available-for-sale
Debt securities:
Obligations of
U.S. government-    $         $        $         $        $         $ 
                    1,489     1,499    1,614     1,636    3,134     3,190
sponsored
corporations
Obligations of
states and
                    68,900     73,959    69,067     73,692    77,541     82,299
political
subdivisions
Mortgage-backed     257,435    264,583   256,882    263,376   279,393    285,706
securities^(1)
Total debt          327,824    340,041   327,563    338,704   360,068    371,195
securities
Stock investments:
Mutual funds        3,000      3,170     3,000      3,145     3,000      3,111
Total stock                              3,000      3,145     3,000      3,111
investments
Total               $330,824   $343,211  $330,563   $341,849  $363,068   $374,306
available-for-sale

 (1) Comprised of pass-through debt securities collateralized by conventional
     residential mortgages and guaranteed by either Fannie Mae, Freddie
     Mac or Ginnie Mae, which are, in turn, backed by the United States
     government.



 The following table sets forth the composition of the Company's loan and
 lease portfolio at the dates indicated:
                 September 30, 2012   June 30, 2012        December 31, 2011
                 Amount      Percent  Amount      Percent  Amount      Percent
 Loan portfolio  (Dollars in thousands)
 composition
 Residential
 real estate     $327,454    36.3%    $320,899    35.9%    $316,823    36.4%
 loans
 Commercial      147,677     16.4%    153,542     17.2%    151,420     17.4%
 loans
 Commercial      126,783     14.1%    129,508     14.5%    126,863     14.6%
 real estate
 Leases, net of
 unearned        11,811      1.3%     13,563      1.5%     25,636      3.0%
 income
 Indirect loans  199,419     22.1%    188,765     21.1%    158,813     18.3%
 Other consumer  88,739      9.8%     88,092      9.8%     89,776      10.3%
 loans
 Total loans     901,883     100.0%   894,369     100.0%   869,331     100.0%
 and leases
 Net deferred    4,500                4,083                3,390
 loan costs
 Allowance for
 credit          (8,483)              (8,892)              (10,769)
 losses
 Net loans and   $897,900             $889,560             $861,952
 leases
 The following table sets forth the composition of the Company's deposits at
 the dates indicated:
                 September 30, 2012   June 30, 2012        December 31, 2011
                 Amount      Percent  Amount      Percent  Amount      Percent
 Deposit         (Dollars in thousands)
 composition
 Non-interest    $                   $                   $ 
 bearing         212,437     18.9%    203,885     18.5%    185,736     17.1%
 checking
 Interest
 bearing         159,680     14.2%    158,701     14.3%    145,885     13.5%
 checking
 Total checking  372,117     33.1%    362,586     32.8%    331,621     30.6%
 Savings         115,229     10.2%    116,664     10.5%    107,311     9.9%
 Money market    380,623     33.8%    358,025     32.4%    330,000     30.5%
 Time deposits   258,434     22.9%    269,297     24.3%    314,133     29.0%
 Total deposits  $1,126,403  100.0%   $1,106,572  100.0%   $1,083,065  100.0%



Alliance Financial Corporation

Asset Quality (Unaudited)
The following table represents a summary of delinquent loans and leases
grouped by the number of days delinquent at the dates indicated:
Delinquent loans and       September 30, 2012     June 30, 2012  December 31,
leases                                                           2011
                           $           %^(1)      $       %^(1)  $       %^(1)
                           (Dollars in thousands)
30 days past due           $ 4,152     0.46%      $ 5,220 0.58%  $ 5,202 0.60%
60 days past due           1,812       0.20%      732     0.08%  584     0.06%
90 days past due and       —           —          —       —      —       —
still accruing
Non-accrual                4,104       0.46%      6,660   0.75%  11,261  1.30%
Total                      $10,068     1.12%      $12,612 1.41%  $17,047 1.96%

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



The following table represents information concerning the aggregate amount of
non-performing assets:
Non-performing assets              September 30,      June 30,   December 31,
                                   2012               2012       2011
                                   (Dollars in thousands)
Non-accruing loans and leases
 Residential real estate loans   $2,302             $2,549     $ 3,062
 Commercial loans                579                1,464      3,375
 Commercial real estate          505                1,879      4,051
 Leases                          52                 74         107
 Indirect loans                  220                288        293
 Other consumer loans            446                406        373
Total non-accruing loans and       4,104              6,660      11,261
leases
Accruing loans and leases          —                  —          —
delinquent 90 days or more
Total non-performing loans and     4,104              6,660      11,261
leases
Other real estate and              985                51         485
repossessed assets
Total non-performing assets        $5,089             $6,711     $11,746
Troubled debt restructurings not   $2,704             $2,133     $ 1,653
included in above



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 ended          Nine months ended

Allowance for credit       September 30,               September 30,
losses
                           2012          2011          2012          2011
                           (Dollars in thousands)
Allowance for credit
losses, beginning of       $8,892        $10,683       $10,769       $10,683
period
Loans and leases           (621)         (511)         (2,978)       (1,564)
charged-off
Recoveries of loans
and leases previously      212           372           992           1,065
charged-off
Net loans and leases       (409)         (139)         (1,986)       (499)
charged-off
Provision for credit       —             750           (300)         1,110
losses
Allowance for credit       $8,483        $11,294       $8,483        $11,294
losses, end of period



Alliance Financial Corporation

Consolidated Financial Information (Unaudited)
                               At or for the three  At or for the nine months
                                months
Key Ratios                                           ended September 30,
                                ended September 30,
                                2012        2011     2012            2011
Return on average assets        0.64%       1.01%    0.74%           0.95%
Return on average equity        6.32%       10.69%   7.34%           10.47%
Return on average tangible      8.57%       14.91%   10.02%          14.83%
equity
Yield on earning assets         3.86%       4.41%    3.95%           4.44%
Cost of funds                   0.77%       1.10%    0.86%           1.12%
Net interest margin (tax        3.23%       3.48%    3.24%           3.49%
equivalent) ^(1)
Non-interest income to total    31.54%      29.47%   31.31%          29.03%
income ^(2)
Efficiency ratio ^(3)           80.56%      71.45%   77.49%          70.24%
Common dividend payout ratio    66.67%      40.26%   57.32%          41.36%
^(4)
Net loans and leases
charged-off to average loans    0.18%       0.06%    0.30%           0.08%

 and leases, annualized
Provision for credit losses to
average loans and               —%          0.34%    (0.05)%         0.17%

 leases, annualized
Allowance for credit losses to  0.94%       1.30%    0.94%           1.30%
total loans and leases
Allowance for credit losses to
non-performing loans            206.7%      92.6%    206.7%          92.6%

 and leases
Non-performing loans and
leases to total loans and       0.46%       1.40%    0.46%           1.40%

 leases
Non-performing assets to total  0.35%       0.90%    0.35%           0.90%
assets

 (1) Tax equivalent net interest income divided by average earning assets
 (2) Non-interest income (excluding net realized gains and losses on
     securities and other non-recurring gains and losses) divided
     by the sum of net interest income and non-interest income (as adjusted)
 (3) Non-interest expense divided by the sum of net interest income and
     non-interest income (as adjusted)
 (4) Cash dividends declared per share divided by diluted earnings per share



Alliance Financial Corporation

Selected Quarterly Financial Data (Unaudited)
                       2012                               2011
                       Third        Second         First  Fourth     Third
                       (Dollars in thousands, except share and per share data)
Interest income        $11,979      $12,217    $12,463    $12,942    $14,061
Interest expense       2,025        2,212      2,622      2,928      3,064
Net interest income    9,954        10,005     9,841      10,014     10,997
Provision for credit   —            (300)      ―          800        750
losses
Net interest income
after provision for    9,954        10,305     9,841      9,214      10,247
credit losses
Other non-interest     4,584        4,524      4,476      5,062      5,919
income
Other non-interest     11,713       11,016     10,888     10,640     11,139
expense
Income before income   2,825        3,813      3,429      3,636      5,027
tax expense
Income tax expense     540          895        790        791        1,360
Net income             $ 2,285      $ 2,918    $ 2,639    $ 2,845    $ 3,667
Stock and related per
share data
Basic earnings per     $  0.48     $  0.61   $  0.55   $  0.60   $  0.77
common share
Diluted earnings per   $  0.48     $  0.61   $  0.55   $  0.60   $  0.77
common share
Basic weighted
average common shares  4,702,294    4,700,992  4,698,567  4,687,802  4,667,355
outstanding
Diluted weighted
average common shares  4,702,294    4,700,992  4,698,567  4,689,427  4,673,908
outstanding
Cash dividends paid    $ 0.32      $  0.31   $  0.31   $  0.31   $  0.31
per common share
Common dividend        66.67%       50.82%     56.36%     51.67%     40.26%
payout ratio ^(1)
Common book value      $31.03       $ 30.69    $ 30.30    $ 30.19    $ 30.15
Tangible common book   $23.11       $ 22.73    $ 22.30    $ 22.11    $ 21.99
value ^(2)
Capital Ratios
Holding Company
Tier 1 leverage ratio  9.43%        9.38%      9.26%      9.09%      8.80%
Tier 1 risk based      14.82%       14.74%     14.99%     14.71%     14.42%
capital
Tier 1 risk based      11.98%       11.89%     12.05%     11.81%     11.52%
common capital ^(3)
Total risk based       15.79%       15.75%     16.09%     15.97%     15.68%
capital
Tangible common
equity to tangible     7.85%        7.85%      7.75%      7.69%      7.50%
assets^(4)
Bank
Tier 1 leverage ratio  8.86%        8.81%      8.68%      8.50%      8.25%
Tier 1 risk based      13.96%       13.86%     14.10%     13.80%     13.58%
capital
Total risk based       14.94%       14.89%     15.21%     15.05%     14.84%
capital
Selected ratios
Return on average      0.64%        0.82%      0.74%      0.80%      1.01%
assets
Return on average      6.32%        8.21%      7.51%      8.19%      10.69%
equity
Return on average
tangible common        8.57%        11.22%     10.33%     11.34%     14.91%
equity
Yield on earning       3.86%        3.95%      4.04%      4.15%      4.41%
assets
Cost of funds          0.77%        0.83%      0.98%      1.08%      1.10%
Net interest margin    3.23%        3.26%      3.22%      3.24%      3.48%
(tax equivalent) ^(5)
Non-interest income    31.54%       31.14%     31.26%     33.58%     29.47%
to total income ^(6)
Efficiency ratio ^(7)  80.56%       75.52%     76.05%     70.58%     71.45%
Asset quality ratios
Net loans and leases
charged off to
average loans          0.18%        0.08%      0.66%      0.61%      0.06%

 and leases,
annualized
Provision for credit
losses to average
loans and              —            (0.14)%    —          0.37%      0.34%

 leases, annualized
Allowance for credit
losses to total loans  0.94%        0.99%      1.08%      1.24%      1.30%
and leases
Allowance for credit
losses to
non-performing loans   206.7%       133.5%     105.0%     95.6%      92.6%

 and leases
Non-performing loans
and leases to total    0.46%        0.74%      1.03%      1.30%      1.40%
loans and leases
Non-performing assets  0.35%        0.47%      0.65%      0.83%      0.90%
to total assets

(1) Cash dividends declared per common share divided by diluted earnings per
    common share
(2) Common shareholders' equity less goodwill and intangible assets divided by
    common shares outstanding
(3) Tier 1 capital excluding junior subordinated obligations issued to
    unconsolidated trusts divided by total risk-adjusted assets
(4) The Company uses certain non-GAAP financial measures, such as the Tangible
    Common Equity to Tangible Assets ratio (TCE), to provide information for
    investors to effectively analyze financial trends of ongoing business
    activities, and to enhance comparability with peers across the financial
    sector. The
    Company believes TCE is useful because it is a measure utilized by
    regulators, market analysts and investors in evaluating a company's
    financial condition
    and capital strength. TCE, as defined by the Company, represents common
    equity less goodwill and intangible assets. A reconciliation from the
    Company's
    GAAP Total Equity to Total Assets ratio to the Non-GAAP Tangible Common
    Equity to Tangible Assets ratio is presented below:



                    September   June 30,    March 31,   December    September
                    30,                                 31,         30,
                                2012       2012
                    2012                               2011        2011
                    (Dollars in thousands)
Total assets        $1,446,040  $1,422,838  $1,415,594  $1,409,090  $1,430,783
Less: Goodwill
and intangible      37,873      38,094      38,317      38,538      38,760

assets, net
Tangible assets     1,408,167   1,384,744   1,377,277   1,370,552   1,392,023
(non-GAAP)
Total Common        148,378     146,844     144,992     143,997     143,137
Equity
Less: Goodwill
and intangible      37,873      38,094      38,317      38,538      38,760

assets, net
Tangible Common
Equity (non-        110,505     108,750     106,675     105,459     104,377

GAAP)
Total Equity/Total  10.26%      10.32%      10.24%      10.22%      10.00%
Assets
Tangible Common
Equity/Tangible
                    7.85%       7.85%       7.75%       7.69%       7.50%
Assets
(non-GAAP)

(5) Tax equivalent net interest income divided by average earning assets
(6) Non-interest income (net of realized gains and losses on securities and
    other non-recurring items) divided by the sum of net interest
    income and non-interest income (as adjusted)
(7) Non-interest expense divided by the sum of net interest income and
    non-interest income (as adjusted)



SOURCE Alliance Financial Corporation