**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

 
| x                                                    | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                        |
|------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **For the fiscal year ended December 31, 2007** |
|                                                 |                                                                                                                                                                                                                                                                                       |
| **OR**                                               |
|                                                 |                                                                                                                                                                                                                                                                                       |
| o                                                    | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                    |
|                                                 | **For the transition period from                        to                      ** |

 

**Commission File No.:  001-33189**

 

**ALLIANCE BANCORP, INC. OF PENNSYLVANIA**

(Exact name of registrant as specified in its charter)

 

| **Pennsylvania**                  | ** ** | **56-2637804**         |
|-----------------------------------|------------|------------------------|
| (State or other jurisdiction      |       | (I.R.S. Employer       |
| of incorporation or organization) |       | Identification Number) |
|                              |       |                   |
| **541 Lawrence Road**             |       |                   |
| **Broomall, Pennsylvania**        | ** ** | **19008**              |
| (Address)                         |       | (Zip Code)             |

 

Registrant’s telephone number, including area code: ** (610) 353-2900**

 

Securities registered pursuant to Section 12(b) of the Act:

 

| **Title of Class**                       | ** ** | **Name of Each Exchange on Which Registered** |
|------------------------------------------|------------|-----------------------------------------------|
| Common Stock (par value $0.01 per share) |       | Nasdaq Global Market                          |

 

Securities registered pursuant to Section 12(g) of the Act: **Not Applicable**

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o    No  x

 

Indicate  by  check  mark if the  Registrant  is not  required  to file  reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o    No  x

 

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  wasrequired  to file  such  reports),  and  (2) has  been  subject  to such  filing requirements for the past 90 days. Yes  x    No  o

 

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405 of Regulation  S-K is not contained  herein,  and will not be contained,  to the best  of  the  Registrant’s   knowledge,  in  definitive  proxy  or  information statements  incorporated  by  reference  in Part  III of this  Form  10-K or any amendment to this Form 10-K.  x

 

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

Large accelerated filer  o    Accelerated filer  o    Non-accelerated filer  o    Smaller Reporting Company  x

 

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

 

Asof June 30, 2007, the aggregate value of the 7,225,000 shares of CommonStock of the Registrant issued and outstanding on such date, which excludes3,973,750 shares held by the Registrant’s mutual holding company, AllianceMutual Holding Company, and 380,267 shares held by all directors and officersof the Registrant and the Registrant’s Employee Stock Ownership Plan (“ESOP”)as a group, was approximately $26.7 million. This figure is based on the last known trade price of $9.29 per share ofthe Registrant’s Common Stock on June 30, 2007.  Although directors and officers and the ESOPwere assumed to be “affiliates” of the Registrant for purposes of thiscalculation, the classification is not to be interpreted as an admission ofsuch status.

 

The number of shares outstanding of Common Stock of the Registrant as of March 14, 2008, was 7,088,500.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

(1)                                  Portions of thedefinitive proxy statement for the 2007 Annual Meeting of Stockholders areincorporated into Part III.

 

----

 

**PART I**

 

**Item 1.  Business**

 

**General**

 

AllianceBancorp, Inc. of Pennsylvania (“Alliance Bancorp” or the “Company”) is afederally chartered savings and loan holding company which owns 100% ofAlliance Bank (“Bank”)which is a community oriented savings bank headquartered in Broomall,Pennsylvania.  On January 30, 2007,the Bank completed its reorganization to a mid-tier holding company structureand the sale of the shares of its common stock. In the reorganization and offering, the Company sold 1,807,339 shares ofcommon stock at a purchase price of $10.00 per share and issued 5,417,661shares of common stock in exchange for former outstanding shares of AllianceBank (the “Bank”).  Each share of theBank’s common stock was converted into 2.09945 shares of the Company’s.  The offering resulted in approximately $16.5million in net proceeds.  The significantasset of the Company is the capital stock of the Bank.

 

We operate a total of nine banking offices located in Delaware andChester Counties, which are suburbs of Philadelphia.  Our primary business consists of attractingdeposits from the general public and using those funds, together with funds weborrow, to originate loans to our customers and invest in securities such asU.S. Government and agency securities, mortgage-backed securities and municipalobligations.  At December 31, 2007,we had $424.5 million of total assets, $330.8 million of total deposits andstockholders’ equity of $51.5 million.

 

The Company is subject to supervision and regulation by the Office ofThrift Supervision (“OTS”).  The Bank issubject to regulation by the Pennsylvania Department of Banking (the “Department”),as its chartering authority and primary regulator, and by the Federal DepositInsurance Corporation (the “FDIC”), which insures the Bank’s deposits up toapplicable limits.

 

**Market Area and Competition**

 

Alliance Bank is headquartered in Broomall, Pennsylvania and conductsits business through eight offices located in Delaware County, Pennsylvania,and one office in Chester County, Pennsylvania. The primary market areas served by Alliance Bank are Delaware andChester Counties, Philadelphia, and the suburban areas to the west and south ofPhiladelphia, including southern New Jersey. The areas served by the Bank are included in the Philadelphia PrimaryMetropolitan Statistical Area (“PMSA”). The Philadelphia PMSA is the nation’s fourth largest metropolitan areabased on total population.  Based on 2000census data, the Philadelphia PMSA population was estimated at 5.0 million,including 1.0 million people in Delaware and Chester Counties.  Population growth in Chester County hasincreased at a relatively strong 1.7% annual rate during the 2000-2005 period,while the population in Delaware County has increased at a comparatively modestannual pace of 0.5% over that time.  Themedia household income in 2005 for Delaware and Chester Counties was $62,297and $81,043, respectively, compared to $48,534 and $49,747, respectively, forthe Commonwealth of Pennsylvania and the United States.  Delaware and Chester Counties are bedroomcommunities to near by Philadelphia, although local employment has continued togrow as many employers have found suburban locations to be attractive.  The economy in the Bank’s market area isrelatively diverse and includes the education, health and social servicessector, manufacturing, the professional and scientific sector and the finance,insurance, real estate and leasing sectors. The largest employers in Delaware County include Boeing, the Keystone CrozerHealth System, Wyeth-Ayerst Laboratories, Mercy Health and VillanovaUniversity, while the largest employers in Chester County include VanguardSecurities and QVC.

 

We face significant competition in originating loans and attractingdeposits.  This competition stemsprimarily from commercial banks, other savings banks and savings associationsand mortgage-banking companies.  Thereare more than 350 financial institution branches located in Delaware andChester Counties (not including credit unions). Many of the financial service providers operating in our market area aresignificantly larger, and have greater financial resources, than us.  We face additional competition for depositsfrom short-term money market funds and other corporate and governmentsecurities funds, mutual funds and from other non-depository financialinstitutions such as brokerage firms and insurance companies.

 

 

 

2

----

 

**Lending Activities**

 

**General.**  At December 31,2007, the Bank’s total portfolio of loans receivable amounted to $259.8million, or 61.2%, of the Bank’s $424.5 million of total assets at suchtime.  The Bank has traditionallyconcentrated its lending activities on first mortgage loans secured byresidential property.  However, over thepast several years, the Bank has placed an emphasis on loans secured bycommercial real estate properties. Consistent with such approach, commercial real estate loans amounted to$122.7 million or 47.2% of the total loan portfolio at December 31,2007.  To a significantly lesser extent,the Bank also originates multi-family loans, land and construction loans,consumer loans and commercial business loans. At December 31, 2007, such loan categories amounted to $1.7million, $14.6 million, $2.4 million and $6.9 million, respectively, or 0.6%,5.6%, 0.9% and 2.7% of the total loan portfolio, respectively.

 

The Bank intends to continue the origination of single-familyresidential mortgage loans as well as its emphasis on increasing the originationof commercial real estate loans.  For theyear ended December 31, 2007, the Bank’s commercial real estate loansincreased by $14.4 million or 13.3% to $122.7 million. For the year ended December 31,2007, the Bank’s single-family mortgage loans increased by $2.9 million or 2.8%to $111.5 million.   This loan growth wassupplemented by an increase in land and construction loans from $11.8 millionat December 31, 2006 to $14.6 million at December 31, 2007.

 

 

 

3

----

 

**Loan Portfolio Composition**.  The following table sets forth thecomposition of the Bank’s loan portfolio by type of loan at the datesindicated.

 
| ** **                     | ** ** | **December 31,**       | ** ** |
|--------------------------------|------------|-----------------------------|------------|
| ** **                     | ** ** | **2007**                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                     | ** ** | **Amount**                  | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
|                           |       | **(Dollars  in Thousands)** |       |
| Real estate loans:             |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Single-family  (1) (2)    |       | $111,499                    |       | 42.92 | % | $108,551 |   | 45.48 | % | $104,020 |   | 45.79 | % | $88,128 |   | 41.74 | % | $86,907 |   | 40.80 | % |
| Multi-family                   |       | 1,673                       |       | 0.64 |   | 2,088 |   | 0.87 |   | 2,221 |   | 0.98 |   | 2,488 |   | 1.17 |   | 2,534 |   | 1.19 |   |
| Commercial                     |       | 122,703                     |       | 47.24 |   | 108,339 |   | 45.39 |   | 105,687 |   | 46.53 |   | 103,444 |   | 48.44 |   | 105,039 |   | 49.31 |   |
| Land and construction (3) |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                    |       | 6,034                       |       | 2.32 |   | 6,700 |   | 2.81 |   | 3,520 |   | 1.55 |   | 4,244 |   | 1.99 |   | 2,671 |   | 1.26 |   |
| Commercial                     |       | 8,557                       |       | 3.29 |   | 5,074 |   | 2.13 |   | 3,876 |   | 1.71 |   | 4,833 |   | 2.26 |   | 6,480 |   | 3.04 |   |
| Total real estate  loans       |       | 250,466                     |       | 96.41 |   | 230,752 |   | 96.68 |   | 219,324 |   | 96.55 |   | 204,137 |   | 95.60 |   | 203,631 |   | 95.60 |   |
|                           |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consumer:                      |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Student                        |       | 1,782                       |       | 0.69 |   | 1,779 |   | 0.75 |   | 2,440 |   | 1.07 |   | 2,946 |   | 1.38 |   | 2,974 |   | 1.40 |   |
| Savings account                |       | 477                         |       | 0.18 |   | 561 |   | 0.24 |   | 566 |   | 0.25 |   | 633 |   | 0.30 |   | 713 |   | 0.34 |   |
| Other                          |       | 109                         |       | 0.04 |   | 103 |   | 0.04 |   | 88 |   | 0.04 |   | 57 |   | 0.03 |   | 69 |   | 0.03 |   |
| Total consumer  loans          |       | 2,368                       |       | 0.91 |   | 2,443 |   | 1.02 |   | 3,094 |   | 1.36 |   | 3,756 |   | 1.77 |   | 3,756 |   | 1.77 |   |
|                           |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial  business loans     |       | 6,924                       |       | 2.68 |   | 5,485 |   | 2.30 |   | 4,745 |   | 2.09 |   | 5,754 |   | 2.69 |   | 5,611 |   | 2.63 |   |
|                           |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total loans  receivable        |       | 259,758                     |       | 100.00 | % | 238,680 |   | 100.00 | % | 227,163 |   | 100.00 | % | 213,527 |   | 100.00 | % | 212,998 |   | 100.00 | % |
|                           |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Less:                          |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred costs  (fees)         |       | (5                          | )          |   |   | 75 |   |   |   | 199 |   |   |   | 642 |   |   |   | 940 |   |   |   |
| Allowance for  loan losses     |       | 2,831                       |       |   |   | 2,719 |   |   |   | 2,670 |   |   |   | 2,608 |   |   |   | 2,240 |   |   |   |
|                           |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable,  net         |       | $256,932                    |       |   |   | $235,886 |   |   |   | $224,294 |   |   |   | $210,277 |   |   |   | $209,318 |   |   |   |
|                                |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1) AtDecember 31, 2007, 2006, 2005, 2004, and 2003, includes $-0-, $125,000,$-0-, $565,000, and $640,000 of loans classified as held for sale,respectively.

 

(2) AtDecember 31, 2007, 2006, 2005, 2004, and 2003, includes $29.5 million,$28.9 million, $22.8 million, $21.2 million, and $19.9 million respectively, ofhome equity loans.

 

(3) AtDecember 31, 2007, 2006, 2005, 2004, and 2003, excludes $10.8 million,$9.7 million, $2.9 million, $5.4 million, and $5.3 million respectively, ofundisbursed funds on land and construction loans.

 

 

4

----

**Contractual Maturities**. The following table sets forth the scheduled contractual maturities ofthe Bank’s loans receivable at December 31, 2007.  Demand loans, loans having no stated scheduleof repayments and no stated maturity and overdraft loans are reported as due inone year or less.  Adjustable-rate loansare reported on a contractual basis rather than on a repricing basis.  The amounts shown for each period do not takeinto account loan prepayments and normal amortization of the Bank’s loanportfolio.

 
| ** **                                          | ** ** | **Real Estate Loans** | ** ** | ** **       | ** ** | ** **     | ** ** | ** **                | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|------------------|------------|----------------|------------|---------------------------|------------|
| ** **                                          | ** ** | **Single-family**     | ** ** | **Multi-family** | ** ** | **Commercial** | ** ** | **Land and Construction** | ** ** | **Consumer and Other Loans** | ** ** | **Commercial Business Loans** | ** ** | **Total** | ** ** |
| ** **                                          | ** ** | **(In Thousands)**    | ** ** |
|                                                |       |                  |       |             |       |           |       |                      |       |   |   |   |   |   |   |
| Amounts due in:                                     |       |                  |       |             |       |           |       |                      |       |   |   |   |   |   |   |
| One year or less                                    |       | $                     | 461        |             | $          | 170            |       | $                         | 2,910      |   | $ | 9,562 |   | $ | 1,093 |   | $ | 1,374 |   | $ | 15,570 |   |
| After one year  through three years                 |       | 2,538                 |       | 155              |       | 7,078          |       | 5,029                     |       | 179 |   | 1,078 |   | 16,057 |   |
| After three  years through five years               |       | 4,024                 |       | 1,105            |       | 16,960         |       | —                    |       | 981 |   | 1,310 |   | 24,380 |   |
| After five years  through fifteen years             |       | 34,347                |       | 243              |       | 70,908         |       | —                    |       | 15 |   | 594 |   | 106,107 |   |
| Over fifteen  years                                 |       | 70,129                |       | —           |       | 24,847         |       | —                    |       | 100 |   | 2,568 |   | 97,644 |   |
| Total (1)                                           |       | $                     | 111,499    |             | $          | 1,673          |       | $                         | 122,703    |   | $ | 14,591 |   | $ | 2,368 |   | $ | 6,924 |   | $ | 259,758 |   |
|                                                |       |                  |       |             |       |           |       |                      |       |   |   |   |   |   |   |
| Interest rate  terms on amounts due after one year: |       |                  |       |             |       |           |       |                      |       |   |   |   |   |   |   |
| Fixed                                               |       | $                     | 45,515     |             | $          | 1,503          |       | $                         | 44,281     |   | — |   | — |   | $ | 2,982 |   | $ | 94,281 |   |
| Adjustable                                          |       | $                     | 65,523     |             | —     |           | $          | 75,512                    |       | $ | 5,029 |   | $ | 1,275 |   | $ | 2,568 |   | $ | 149,907 |   |

----

(1) Does notinclude the effects relating to the allowance for loan losses and unearnedincome.

 

Scheduled contractual amortization of loans doesnot reflect the expected term of the Bank’s loan portfolio.  The average life of loans is substantiallyless than their contractual terms because of prepayments and due-on-saleclauses, which gives the Bank the right to declare a conventional loanimmediately due and payable in the event, among other things, that the borrowersells the real property subject to the mortgage and the loan is notrepaid.  The average life of mortgageloans tends to increase when current mortgage loan rates are higher than rateson existing mortgage loans and, conversely, decrease when rates on existingmortgage loans are lower than current mortgage loan rates (due to refinancingsof adjustable-rate and fixed-rate loans at lower rates).  Under the latter circumstance, the weightedaverage yield on the loan portfolio decreases as higher-yielding loans arerepaid or refinanced at lower rates.

 

 

5

----

 

The following table shows origination, purchase and sale activity of theBank with respect to its loans during the periods indicated.

 
| ** **                            | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                            | ** ** | **(In Thousands)**               | ** ** |
|                                  |       |                             |       |   |   |   |   |
| Real estate loan originations:        |       |                             |       |   |   |   |   |
| Single-family  (1)                    |       | $                                | 28,601     |   | $ | 33,660 |   | $ | 43,754 |   |
| Multi-family                          |       | 980                              |       | 640 |   | 1,864 |   |
| Commercial                            |       | 32,913                           |       | 21,073 |   | 22,658 |   |
| Land and  construction:               |       |                             |       |   |   |   |   |
| Residential                           |       | 6,770                            |       | 6,208 |   | 1,462 |   |
| Commercial                            |       | 2,828                            |       | 6,782 |   | — |   |
| Total real  estate loan originations  |       | 72,092                           |       | 68,363 |   | 69,738 |   |
|                                  |       |                             |       |   |   |   |   |
| Consumer originations:                |       |                             |       |   |   |   |   |
| Student                               |       | 582                              |       | 482 |   | 602 |   |
| Savings account                       |       | 330                              |       | 433 |   | 477 |   |
| Other                                 |       | 7                                |       | 24 |   | 10 |   |
| Total consumer  loan originations     |       | 919                              |       | 939 |   | 1,089 |   |
|                                  |       |                             |       |   |   |   |   |
| Commercial business originations      |       | 3,909                            |       | 2,820 |   | 2,088 |   |
| Total loan  originations              |       | 76,920                           |       | 72,122 |   | 72,915 |   |
|                                  |       |                             |       |   |   |   |   |
| Purchase of real estate loans:        |       |                             |       |   |   |     |   |
| Single-family                         |       | —                           |       | — |   | — |   |
| Multi-family                          |       | —                           |       | — |   | — |   |
| Residential  construction             |       | —                           |       | — |   | — |   |
| Commercial                            |       | 113                              |       | 3,649 |   | 508 |   |
| Commercial  construction              |       | —                           |       | — |   | — |   |
| Total real  estate loan purchases     |       | 113                              |       | 3,649 |   | 508 |   |
| Total loan originations and purchases |       | 77,033                           |       | 75,771 |   | 73,423 |   |
|                                  |       |                             |       |   |   |   |   |
| Less:                                 |       |                             |       |   |   |   |   |
| Principal loan  repayments            |       | (51,002                          | )          | (61,814 | ) | (51,577 | ) |
| Loans and  participations sold        |       | (4,762                           | )          | (2,319 | ) | (7,525 | ) |
| Other, net (2)                        |       | (223                             | )          | (46 | ) | (120 | ) |
|                                  |       |                             |       |   |   |   |   |
| Net increase                          |       | $                                | 21,046     |   | $ | 11,592 |   | $ | 14,201 |   |

----

(1)          Includes $9.9million, $19.3 million and $9.5 million of home equity loans and lines ofcredit originated during the years ended December 31, 2007, 2006 and 2005,respectively.

 

(2)   Includes gains on the sale ofloans, provisions for loan losses and transfers to other real estate owned.

 

**Origination, Purchase and Sale ofLoans.**  The lending activities of theBank are subject to the written, non-discriminatory, underwriting standards andloan origination procedures established by the Bank’s Board of Directors andmanagement.  Loan originations areobtained by a variety of sources, including referrals from real estate brokers,builders, existing customers, advertising, walk-in customers and, to a significantextent, mortgage brokers who obtain credit reports, appraisals and otherdocumentation involved with a loan. Property valuations are always performed by independent outsideappraisers.  Title and hazard insuranceare generally required on all security property other than property securing ahome equity loan, in which case the Bank obtains a title opinion.  The majority of the Bank’s loans are securedby property located in its primary lending area.

 

 

6

----

 

Any member of the Bank’s Senior Loan Committee may approve any loan upto $100,000.  Loans between $100,000 and$500,000 must be approved by any two members of the Senior Loan Committee.  Loans between $500,000 and $1.0 million mustbe approved by the Chief Executive Officer plus one member of the Senior LoanCommittee, except for single-family residential loans which may be approved byany two members of the Senior Loan Committee. Loans between $1.0 million and $2.0 million must be approved by amajority vote of the Senior Loan Committee. Loans over $2.0 million must be approved by the entire Board ofDirectors.  All loans are ratified by theBoard of Directors.  The Senior LoanCommittee currently consists of the Chairman of the Board, Chief ExecutiveOfficer, the Chief Financial Officer and three Senior Lending Officers.

 

The Bank’s single-family loan originations amounted to $28.6 million and$33.7 million during 2007 and 2006, respectively.  When possible, the Bank emphasizes theorigination of single-family residential adjustable-rate mortgage loans (“ARMs”).  Originations of such loans amounted to $12.6million or 44.1% and $10.1 million or 29.9% of single-family residential realestate loan originations during 2007 and 2006, respectively.  The Bank also originates fixed-ratesingle-family residential real estate loans with terms of five, ten, twelve, 15and 30 years.  Generally, fixed-rateresidential mortgage loans with terms greater than 15 years have beenoriginated pursuant to commitments to sell such loans to correspondentmortgage-banking institutions in order to reduce the proportion of the Bank’sloan portfolio comprised of such assets and reduce interest rate risk.  Loans are sold without any recourse to theBank by the purchaser in the event of default on the loan by the borrower andare sold with servicing released.  TheBank sold $4.3 million and $2.3 million of long-term (generally over 15 years)fixed-rate residential loans during 2007 and 2006, respectively.  Such loan sales were conducted in furtheranceof the Bank’s asset/liability strategies. At December 31, 2007, there wereno loans held for sale compared to $125,000 at December 31, 2006.

 

In accordance with the Bank’s increased emphasis on commercial realestate loan originations, such originations amounted to $32.9 million and $21.1million during 2007 and 2006, respectively. In addition, land and construction loan originations amounted to $9.5million and $13.0 million during 2007 and 2006, respectively.

 

Since 1999, the Bank has provided single-family residential loanproducts to borrowers that did not meet the underwriting criteria of theFederal Home Loan Mortgage Corporation (‘FHLMC”) and the Federal NationalMortgage Association (“FNMA”) and where the borrower’s credit score is below660.  The Bank recognizes that theseloans, which are considered subprime loans, have additional risk factors ascompared to typical single-family residential lending.  These loans are generally not saleable in thesecondary market due to the credit risk characteristics of the borrower, theunderlying documentation, the loan-to-value ratio, or the size of the loan,among other factors.  At December 31,2007 and 2006, the Bank’s single-family loan portfolio included $23.6 millionor 21.1% and $23.3 million or 21.5%, respectively.  The Bank reported $1.8 million or 7.6% and$1.5 million or 6.5% of these loans as non-performing at December 31, 2007and December 31, 2006, respectively. The Bank recognizes the additional risk factors associated with subprimelending and utilizes a higher risk-weighting factor in maintaining itsallowance for loan losses with respect to these loans. In addition, managementcalculates and reports the delinquency ratio of its subprime loan portfolio tothe Board of Directors on a monthly basis.

 

Historically, the Bank has not been an active purchaser of loans.  The Bank purchased $113,000 and $3.6 millionduring 2007 and 2006, respectively, of real estate loans, some of which arelocated outside of its primary lending area. As of December 31, 2007, the outstanding balance of such loansincluded $2.4 million, $270,000, $2.1 million and $4.4 million secured bysingle-family, multi-family, commercial and construction real estateproperties, respectively.  At December 31,2007, $64,000 of these loans were reported as non-performing.

 

At December 31, 2007 and 2006, the Bank was servicing loans forothers amounting to $1.1 million and $567,000, respectively.  Such loans consist of commercial real estateloan participations. Servicing loans for others generally consists ofcollecting mortgage payments, maintaining escrow accounts, disbursing paymentsto investors and foreclosure processing. Loan servicing income is recorded upon receipt and includes servicingfees from investors and certain charges collected from borrowers, such as latepayment fees.

 

**Single-Family Residential Real Estate Loans**.  The Bank has historically concentrated itslending activities on the origination of loans secured primarily by firstmortgage liens on existing single-family residences and intends to continue tooriginate permanent loans secured by first mortgage liens on single-familyresidential properties in the future. At December 31, 2007, $111.5 millionor 42.9% of the Bank’s total loan portfolio consisted of single-familyresidential real estate loans.  Of the$111.5 million of such loans at December 31, 2007, $65.5 million or 58.7%had adjustable rates of interest and $46.0 million or 41.3% had fixed rates ofinterest.

 

 

7

----

 

The Bank’s ARMs typically provide for an interestrate which adjusts every year after an initial period of three, five, seven orten years in accordance with a designated index (the national monthly mediancost of funds or the weekly average yield on U.S. Treasury securities adjustedto a constant comparable maturity of one year) plus a margin.  Such loans are typically based on a 30-yearamortization schedule.  The amount of anyincrease or decrease in the interest rate is presently limited to 2% per year,with a limit of 6% over the life of the loan. The Bank’s adjustable-rate loans currently being originated are notassumable.  The Bank has not engaged inthe practice of using a cap on the payments that could allow the loan balanceto increase rather than decrease, resulting in negative amortization.  The adjustable-rate loans offered by theBank, like many other financial institutions, provide for initial rates ofinterest below the rates which would prevail when the index used for repricingis applied.  However, the Bankunderwrites the loan on the basis of the borrower’s ability to pay at theinitial rate which would be in effect without the discount.  Although the Bank continues to emphasizeARMs, such loan products have not been as attractive due to the lower interestrate environment which has recently prevailed and the decrease in the spreadbetween the rates offered on fixed and adjustable rate loans.

 

Adjustable-rate loans decrease the risks associated with changes ininterest rates but involve other risks, primarily because as interest ratesrise, the payment by the borrower rises to the extent permitted by the terms ofthe loan, thereby increasing the potential for default.  At the same time, the marketability of theunderlying property may be adversely affected by higher interest rates.  The Bank believes that these risks, whichhave not had a material adverse effect on the Bank to date, generally are lessthan the risks associated with holding fixed-rate loans in an increasinginterest rate environment.

 

Due to competitive market pressures, the Bank has continued to originatefixed-rate mortgage loans with terms up to 30 years. Substantially all of theBank’s fixed-rate loans with terms of over 15 years are originated pursuant tocommitments to sell such loans to correspondent mortgage bankinginstitutions.  Fixed-rate loans withterms of 15 years or less are generally originated for portfolio.  In addition, while the Bank offers balloonloans with five, seven and ten year terms based on a 20 to 30 year amortizationschedule, the Bank has only originated a small amount of such loans.

 

The Bank also offers home equity loans with fixed rates of interest andterms of 15 years or less.  The Bank doesnot require that it hold the first mortgage on the secured property; however,the balance on all mortgages on the secured property cannot exceed 90% of thevalue of the secured property.  At December 31,2007, the Bank held a first lien on a majority of the properties securing homeequity loans from the Bank. The Bank has placed an increased emphasis on homeequity loans because of their attractive yields and shorter terms tomaturity.  At December 31, 2007,home equity loans and lines amounted to $29.5 million or 11.3% of the totalloan portfolio.

 

The Bank is permitted to lend up to 100% of the appraised value of thereal property securing a residential loan; however, if the amount of aresidential loan originated or refinanced exceeds 90% of the appraised value,the Bank is required by federal regulations to obtain private mortgageinsurance on the portion of the principal amount that exceeds 84.0% of theappraised value of the security property, with the exception of home equityloans and lines.  Pursuant to underwritingguidelines adopted by the Board of Directors, the Bank will lend up to 95% ofthe appraised value of the property securing a single-family residential loan,and requires borrowers to obtain private mortgage insurance on the portion ofthe principal amount of the loan that exceeds 80% of the appraised value of thesecurity property.  In addition, the Bankwill lend up to 90% of the appraised value with no private mortgage insurancerequired for home equity loans and lines.

 

**Multi-Family Residential and Commercial Real Estate Loans**.  The Bank originates and, to a lesser extent,purchases mortgage loans for the acquisition and refinancing of existingmulti-family residential and commercial real estate properties.  At December 31, 2007, $1.7 million or0.6% of the Bank’s total loan portfolio consisted of loans secured by existingmulti-family residential real estate. Commercial real estate loans increased from $108.3 million or 45.4% ofthe total loan portfolio at December 31, 2006 to $122.7 million or 47.2%of the total loan portfolio at December 31, 2006. Such increase was due tothe Bank’s strategy to increase such lending. The Bank intends to continue to place an increased emphasis on this typeof lending.

 

The majority of the Bank’s multi-familyresidential loans are secured primarily by five to fifteen unit apartmentbuildings, while the Bank’s commercial real estate loans are primarily securedby office buildings, hotels, small retail establishments, restaurants and otherfacilities.  These types of propertiesconstitute the majority of the Bank’s commercial real estate loanportfolio.  The majority of themulti-family residential and commercial real estate loan portfolio at December 31,2007 was secured by properties located in the Bank’s primary market area.  The five largest multi-family or commercialreal estate loan relationships or loan balances outstanding to one borrower at December 31,2007 amounted to $7.0 million, $6.1 million, $6.0 million, $5.5 million and$4.3 million, respectively, all of which were performing in accordance withtheir terms and were current at such date.

 

 

8

----

 

Multi-familyand commercial real estate loans are made on terms up to 30 years, some ofwhich include call or balloon provisions ranging from five to 15 years.  The Bank will originate and purchase theseloans either with fixed interest rates or with interest rates which adjust inaccordance with a designated index.  Loanto value ratios on the Bank’s multi-family and commercial real estate loans aretypically limited to 80%.  As part of thecriteria for underwriting multi-family and commercial real estate loans, theBank generally imposes a debt coverage ratio (the ratio of net cash fromoperations before payment of debt service to debt service) of not less than1.1.  It is also the Bank’s generalpolicy to obtain corporate or personal guarantees, as applicable, on itsmulti-family residential and commercial real estate loans from the principalsof the borrower.

 

Multi-family and commercial real estate lending entails significantadditional risks as compared with single-family residential propertylending.  Such loans typically involvelarge loan balances to single borrowers or groups of related borrowers.  The payment experience on such loans istypically dependent on the successful operation of the real estateproject.  The success of such projects issensitive to changes in supply and demand conditions in the market formulti-family and commercial real estate as well as economic conditionsgenerally.  At December 31, 2007,the Bank had no non-performing multi-family loans and $416,000 innon-performing commercial real estate loans.

 

**Construction Loans.** The Bank also originates residential and commercial construction loans,and to a limited degree, land acquisition and development loans.  Construction loans are classified as eitherresidential construction loans or commercial real estate construction loans atthe time of origination, depending on the nature of the property securing theloan.  The Bank’s construction lendingactivities generally are limited to the Bank’s primary market area.  At December 31, 2007, construction loansamounted to $14.6 million or 5.6% of the Bank’s total loan portfolio, whichconsisted of $6.0 million of residential and $8.6 million of commercial realestate construction loans.

 

The Bank’s residential construction loans areprimarily made to local real estate builders and developers for the purpose ofconstructing single-family homes and single-family residential developments.  Upon application, credit review and analysisof personal and corporate financial statements, the Bank will grant localbuilders lines of credit up to designated amounts.  These loans may be used for the purpose ofconstructing model homes, including a limited number for inventory.  In some instances, lines of credit will alsobe granted for purposes of acquiring improved lots or the purchase ofconstruction in process and developing of speculative properties thereon.  Once approved for a construction loan orcredit line, a developer submits a progress report and a request forpayment.  Generally, the Bank makespayments under the stage of completion method. Prior to making payment, the Bank inspects all construction sites andverifies that the work being submitted for payments has been performed.

 

The Bank’s commercial construction loans have been made to localdevelopers and others for the purpose of developing commercial real estateproperties such as small office buildings and hotels, storage facilities andcommercial building renovations.  Theapplication, credit review and disbursement process are similar to thosementioned above for the Bank’s residential construction loans.

 

The Bank’s construction loans generally have maturities of 12 to 36months, with payments being made monthly on an interest-only basis.  These interest payments are generally paidout of an interest reserve, which is established in connection with theorigination of the loan.  Generally, suchloans adjust monthly based on the prime rate plus a margin of up to 2.0%.Residential and commercial real estate construction loans are generally madewith maximum loan to value ratios of 80% and 75%, respectively, on an ascompleted basis.

 

Construction lending is generally considered to involve a higher levelof risk as compared to single-family residential lending, due to theconcentration of principal in a limited number of loans and borrowers and theeffects of general economic conditions on developers and builders.  Moreover, a construction loan can involveadditional risks because of the inherent difficulty in estimating both aproperty’s value at completion of the project and the estimated cost (includinginterest) of the project.  The nature ofthese loans is such that they are generally more difficult to evaluate andmonitor. In addition, speculative construction loans to a builder are notnecessarily pre-sold and thus pose a greater potential risk to the Bank thanconstruction loans to individuals on their personal residences.

 

The Bank has attempted to minimize the foregoing risks by, among otherthings, limiting the extent of its construction lending and has adoptedunderwriting guidelines which impose stringent loan-to-value, debt service andother requirements for loans which are believed to involve higher elements ofcredit risk, by limiting the geographic area in which the Bank will do businessand by working with builders with whom it has established relationships.  At December 31, 2007, the Bank had nonon-performing construction loans.

 

 

 

9

----

 

**Consumer Loans**.  The Bankoffers consumer loans in order to provide a full range of financial services toits customers and because such loans generally have shorter terms and higherinterest rates than mortgage loans.  Theconsumer loans presently offered by the Bank include student loans, depositaccount secured loans and lines of credit. Consumer loans amounted to $2.4 million or 0.9% of the total loanportfolio at December 31, 2007. Student loans amounted to $1.8 million or 0.7% of the total loan portfolioat December 31, 2007.  Such loansare made to local students for a term of ten years, presently with adjustableinterest rates.  The interest rate isdetermined by the U.S. Department of Education. Loan repayment obligations do not begin until the student has completedhis or her education.  The principal andinterest on such loans is guaranteed by the U.S. Government.  Loans secured by deposit accounts amounted to$477,000 or 0.2% of the total loan portfolio at December 31, 2007.  Such loans are originated for up to 90% ofthe account balance, with a hold placed on the account restricting thewithdrawal of the account balance.

 

Consumer loans generally have shorter terms and higher interest ratesthan mortgage loans but generally involve more credit risk than mortgage loansbecause of the type and nature of the collateral and, in certain cases, theabsence of collateral.  In addition,consumer lending collections are dependent on the borrower’s continuingfinancial stability, and thus are more likely to be adversely effected by jobloss, divorce, illness and personal bankruptcy. In most cases, any repossessed collateral for a defaulted consumer loanwill not provide an adequate source of repayment of the outstanding loanbalance because of improper repair and maintenance of the underlyingsecurity.  The remaining deficiency oftendoes not warrant further substantial collection efforts against theborrower.  The Bank believes that thegenerally higher yields earned on consumer loans compensate for the increasedcredit risk associated with such loans and that consumer loans are important toits efforts to provide a full range of services to its customers.

 

**Commercial Business Loans.** In September 1997, the Bank opened a commercial loan department toprovide a full range of commercial loan products to small business customers inits primary marketing area.  These loansgenerally have shorter terms and higher interest rates as compared to mortgageloans.  Such loans amounted to $6.9million or 2.7% of the total loan portfolio at December 31, 2007 and wereprimarily secured by inventories and other business assets.

 

Although commercial business loans generally are considered to involvegreater credit risk than other certain types of loans, management intends tocontinue to offer commercial business loans to small businesses located in itsprimary market area.  The Bank had nonon-performing commercial business loans at December 31, 2007.

 

**Loan Fee Income**.  Inaddition to interest earned on loans, the Bank receives income from fees inconnection with loan originations, loan modifications, late payments,prepayments and for miscellaneous services related to its loans.  Income from these activities varies fromperiod to period with the volume and type of loans made and competitiveconditions. The Bank charges loan origination fees which are calculated as apercentage of the amount borrowed.  Loanorigination and commitment fees and all incremental direct loan originationcosts are deferred and recognized over the contractual remaining lives of therelated loans on a level yield basis. Discounts and premiums on loans purchased are amortized in the samemanner.

 

**Asset Quality**

 

Loans are placed on non-accrual status when, in the judgment ofmanagement, the probability of collection of interest is deemed to beinsufficient to warrant further accrual. When a loan is placed on non-accrual status, previously accrued butunpaid interest is deducted from interest income.  The Bank does not accrue interest on realestate loans past due 90 days or more unless, in the opinion of management, thevalue of the property securing the loan exceeds the outstanding balance of theloan (principal, interest and escrows) and collection is probable.  The Bank provides an allowance for accruedinterest deemed uncollectible.  Suchallowance amounted to approximately $271,000 at December 31, 2007. Accruedinterest receivable is reported net of the allowance for uncollectedinterest.  Loans may be reinstated toaccrual status when all payments are brought current and, in the opinion ofmanagement, collection of the remaining balance can be reasonably expected.

 

Real estate acquired by the Bank as a result of foreclosure or bydeed-in-lieu of foreclosure is classified as other real estate owned until soldand is initially recorded at the fair value at the date of acquisition.   After the date of acquisition, all costsincurred in maintaining the property are expensed and costs incurred for theimprovement or development of such property are capitalized up to the extent oftheir fair value.

 

Under accounting principles generally accepted in the United States ofAmerica (“GAAP”), the Bank is required to account for certain loanmodifications or restructurings as “troubled debt restructurings.”  In general, the modification 

 

 

10

----

 

or restructuring of a debt constitutes a troubled debt restructuring ifthe Bank, for economic or legal reasons related to the borrower’s financialdifficulties, grants a concession to the borrower that the Bank would nototherwise consider.  Debt restructuringsor loan modifications for a borrower do not necessarily always constitutetroubled debt restructurings, however, and troubled debt restructurings do notnecessarily result in non-accrual loans. The Bank did not have any troubled debt restructurings as of December 31,2007.

 

**Delinquent Loans**.  Thefollowing table sets forth information concerning delinquent loans at December 31,2007, in dollar amounts and as a percentage of each category of the Bank’s loanportfolio.  The amounts presentedrepresent the total outstanding principal balances of the related loans, ratherthan the actual payment amounts which are past due.

 
| ** **             | ** ** | **30 – 59 Days**       | ** ** | **60 – 89 Dayss**                 | ** ** | **90 or More Day** | ** ** |
|------------------------|------------|-----------------------------|------------|----------------------------------------|------------|--------------------|------------|
| ** **             | ** ** | **Amount**                  | ** ** | **Percent**

**of Loan**

**Category** | ** ** | **Amount**         | ** ** | **Percent**

**of Loan**

**Category** | ** ** | **Amount** | ** ** | **Percent**

**of Loan**

**Category** | ** ** |
|                   |       | **(Dollars  in Thousands)** |       |
| Real estate:           |       |                        |       |                                   |       |               |       |   |   |   |   |   |   |
| Single-family          |       | $                           | 501        |                                   | 0.45       | %                  | $          | 60 |   | 0.05 | % | $ | 1,649 |   | 1.48 | % |
| Multi-family           |       | —                      |       | —                                 |       | —             |       | — |   | — |   | — |   |
| Commercial             |       | 936                         |       | 0.76                                   |       | 990                |       | 0.81 |   | 416 |   | 0.34 |   |
| Land and  construction |       | —                      |       | —                                 |       | —             |       | — |   | — |   | — |   |
| Commercial business    |       | 74                          |       | 1.07                                   |       | —             |       | — |   | — |   | — |   |
| Consumer               |       | 32                          |       | 1.35                                   |       | 27                 |       | 1.14 |   | 32 |   | 1.35 |   |
|                   |       |                        |       |                                   |       |               |       |   |   |   |   |   |   |
| Total                  |       | $                           | 1,543      |                                   |       |               | $          | 1,077 |   |   |   | $ | 2,097 |   |   |   |

 

 

11

----

 

The following table sets forth the amounts andcategories of the Bank’s non-performing assets at the dates indicated.  The Bank did not have any troubled debtrestructurings at the dates indicated.

 
| ** **                                                   | ** ** | **December 31,**      | ** ** |
|--------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                   | ** ** | **2007**                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                   | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                         |       |                       |       |   |   |   |   |   |   |   |   |
| Non-accruing loans:                                          |       |                       |       |   |   |   |   |   |   |   |   |
| Real estate:                                                 |       |                       |       |   |   |   |   |   |   |   |   |
| Single-family                                                |       | $                          | 1,086      |   | $ | 874 |   | $ | 762 |   | $ | 762 |   | $ | 1,042 |   |
| Multi-family                                                 |       | —                     |       | — |   | — |   | — |   | — |   |
| Commercial                                                   |       | 416                        |       | — |   | 222 |   | 580 |   | 2,188 |   |
| Land and  construction                                       |       | —                     |       | — |   | — |   | — |   | 1,925 |   |
| Commercial business                                          |       | —                     |       | — |   | — |   | — |   | — |   |
| Consumer                                                     |       | —                     |       | — |   | — |   | — |   | — |   |
| Total  non-accruing loans                                    |       | 1,502                      |       | 874 |   | 984 |   | 1,342 |   | 5,155 |   |
|                                                         |       |                       |       |   |   |   |   |   |   |   |   |
| Accruing loans 90 days or more delinquent:                   |       |                       |       |   |   |   |   |   |   |   |   |
| Real estate:                                                 |       |                       |       |   |   |   |   |   |   |   |   |
| Single-family                                                |       | 563                        |       | 649 |   | 942 |   | 603 |   | 718 |   |
| Multi-family                                                 |       | —                     |       | — |   | — |   | — |   | — |   |
| Commercial                                                   |       | —                     |       | — |   | — |   | — |   | — |   |
| Land and  construction                                       |       | —                     |       | — |   | — |   | — |   | — |   |
| Commercial business                                          |       | —                     |       | — |   | — |   | — |   | — |   |
| Consumer                                                     |       | 32                         |       | 36 |   | 14 |   | 21 |   | 18 |   |
| Total accruing  loans 90 days or more delinquent             |       | 595                        |       | 685 |   | 956 |   | 624 |   | 736 |   |
|                                                         |       |                       |       |   |   |   |   |   |   |   |   |
| Total non-performing loans                                   |       | 2,097                      |       | 1,559 |   | 1,940 |   | 1,966 |   | 5,891 |   |
|                                                         |       |                       |       |   |   |   |   |   |   |   |   |
| Other real estate owned:                                     |       |                       |       |   |   |   |   |   |   |   |   |
| Real estate  acquired through, or in lieu of, foreclosure    |       | —                     |       | — |   | 1,795 |   | 3,475 |   | 2,607 |   |
| Real estate held  for development                            |       | —                     |       | — |   | — |   | — |   | — |   |
| Total other real  estate owned                               |       | —                     |       | — |   | 1,795 |   | 3,475 |   | 2,607 |   |
|                                                         |       |                       |       |   |   |   |   |   |   |   |   |
| Total non-performing assets                                  |       | $                          | 2,097      |   | $ | 1,559 |   | $ | 3,735 |   | $ | 5,441 |   | $ | 8,498 |   |
|                                                         |       |                       |       |   |   |   |   |   |   |   |   |
| Total non-performing loans as a percentage of total  loans   |       | 0.81                       | %          | 0.65 | % | 0.85 | % | 0.92 | % | 2.77 | % |
|                                                         |       |                       |       |   |   |   |   |   |   |   |   |
| Total non-performing assets as a percentage of total  assets |       | 0.49                       | %          | 0.38 | % | 0.96 | % | 1.42 | % | 2.27 | % |

 

If the Bank’s $1.5 million of non-accruing loansat December 31, 2007 had been current in accordance with their termsduring 2007, the gross income on such loans would have been approximately$113,000 for 2007.  The Bank actuallyrecorded $47,000 in interest income on such loans for 2007.

 

 

12

----

 

The Bank’s nonperformingassets, which consist of nonaccruing loans, accruing loans 90 days or moredelinquent and other real estate owned (which includes real estate acquiredthrough, or in lieu of, foreclosure) increased to $2.1 million or 0.5% of totalassets at December 31, 2007 from $1.6 million or 0.4% of total assets at December 31,2006.  At December 31, 2007, theBank’s $2.1 million of nonperforming assets consisted of $595,000 of accruingloans 90 days or more delinquent, $1.5 million of nonaccrual loans and no otherreal estate owned. At December 31, 2007, nonperforming loans consisted of$1.6 million in single-family residential real estate loans, $416,000 incommercial real estate loans, and $32,000 in consumer and other loans.  The $416,000 of nonperforming commercial realestate loans is the result of cash flow stress from select borrowers due to thecurrent economic conditions.  The Bank’smanagement continues to aggressively pursue the collection and resolution ofall delinquent loans.

 

**Classified Assets.** Federal regulations require that each insured savings associationclassify its assets on a regular basis. In addition, in connection withexaminations of insured institutions, federal examiners have authority toidentify problem assets and, if appropriate, classify them.  There are three classifications for problemassets: “substandard,” “doubtful” and “loss.” Substandard assets have one or more defined weaknesses and arecharacterized by the distinct possibility that the insured institution willsustain some loss if the deficiencies are not corrected.  Doubtful assets have the weaknesses ofsubstandard assets with the additional characteristic that the weaknessesmake collection or liquidation in full on the basis of currently existingfacts, conditions and values questionable, and there is a high possibility ofloss.  An asset classified loss isconsidered uncollectible and of such little value that continuance as an assetof the institution is not warranted. Another category designated “special mention” also must be establishedand maintained for assets which do not currently expose an insured institutionto a sufficient degree of risk to warrant classification as substandard,doubtful or loss.

 

At December 31, 2007, the Bank had $10.4million of classified assets, of which $8.0 million consisted of loansclassified as special mention, $2.4 million consisted of loans classified assubstandard, and $24,000 consisted of loans classified as doubtful.  The $8.0 million of loans classified asspecial mention consisted of $2.4 million in commercial real estate, $5.5million in residential real estate construction, and $74,000 in commercialbusiness loans.  The $2.4 million ofloans designated as substandard consisted of $1.6 million of single-family realestate loans and $766,000 of commercial real estate loans.  The $24,000 of loans designated as doubtfulconsisted of a single-family real estate loan. The Company does not knowingly lend to subprime borrowers, except asdisclosed in “Origination, Purchase and Sale of Loans”, and hasnot been materially impacted by the current subprime crisis as of December 31,2007.

 

**Allowancefor Loan Losses**.  The allowance for loan losses isincreased by charges to income and decreased by chargeoffs (net ofrecoveries).  Allowances are provided forspecific loans when losses are probable and can be estimated.  When this occurs, management considers theremaining principal balance, fair value and estimated net realizable value ofthe property collateralizing the loan. Current and future operating and/or sales conditions are alsoconsidered.  These estimates aresusceptible to changes that could result in material adjustments to results ofoperations.  Recovery of the carryingvalue of such loans is dependent to a great extent on economic, operating andother conditions that may be beyond management’s control.

 

General loan lossreserves are established as an allowance for losses based on inherent probablerisk of loss in the loan portfolio.  Inassessing risk, management considers historical experience, volume andcomposition of lending conducted by the Bank, industry standards, status ofnon-performing loans, general economic conditions as they relate to the marketarea and other factors related to the collectibility of the Bank’s loanportfolio.

 

Impaired loans arepredominantly measured based on the fair value of the collateral.  The provision for loan losses charged toexpense is based upon past loan loss experience and an evaluation of probablelosses and impairment existing in the current loan portfolio.  A loan is considered to be impaired when,based upon current information and events, it is probable that the Bank will beunable to collect all amounts due according to the original contractual termsof the loan.  An insignificant delay orinsignificant shortfall in amounts of payments does not necessarily result inthe loan being identified as impaired. For this purpose, delays less than 90 days are considered to beinsignificant.  Large groups of smallerbalance homogeneous loans, including residential real estate and consumerloans, are collectively evaluated for impairment, except for loans restructuredunder a troubled debt restructuring.

 

Althoughmanagement uses the best information available to make determinations withrespect to the provisions for loan losses, additional provisions for loanlosses may be required to be established in the future should economic or otherconditions change substantially.  Inaddition, the Pennsylvania Department of Banking and the FDIC, as an integralpart of their examination process, periodically review the Bank’s allowance forloan losses.  Such agencies 

 

 

13

----

 

mayrequire the Bank to recognize additions to such allowance based on theirjudgments about information available to them at the time of their examination.

 

The following table summarizes changes in theallowance for loan losses and other selected statistics for the periodspresented.

 
| ** **                                               | ** ** | **Year  Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------|------------|
|                                                     |       | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                     |       | **(Dollars  in Thousands)**       | ** ** |
|                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Average loans receivable, net (1)                        |       | $                                 | 247,157    |   | $ | 232,520 |   | $ | 218,036 |   | $ | 211,278 |   | $ | 196,505 |   |
|                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses, beginning of year             |       | $                                 | 2,720      |   | $ | 2,671 |   | $ | 2,608 |   | $ | 2,740 |   | $ | 3,347 |   |
| Charge-offs                                              |       | (14                               | )          | (14 | ) | (95 | ) | (508 | ) | (1,091 | ) |
| Recoveries                                               |       | 5                                 |       | 3 |   | 38 |   | 116 |   | 4 |   |
| Provision for loan losses                                |       | 120                               |       | 60 |   | 120 |   | 210 |   | 480 |   |
|                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses, end of year                   |       | $                                 | 2,831      |   | $ | 2,720 |   | $ | 2,671 |   | $ | 2,608 |   | $ | 2,740 |   |
|                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Net charge-offs to average loans receivable, net         |       | 0.00                              | %          | 0.01 | % | 0.03 | % | 0.16 | % | 0.55 | % |
|                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses to total loans receivable      |       | 1.09                              | %          | 1.14 | % | 1.18 | % | 1.22 | % | 1.29 | % |
|                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses to total non-performing  loans |       | 135.00                            | %          | 174.39 | % | 137.63 | % | 132.65 | % | 46.51 | % |
|                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Net charge-offs to allowance for loan losses             |       | 0.32                              | %          | 0.40 | % | 2.13 | % | 13.11 | % | 39.67 | % |

----

(1) Includesloans held for sale.

 

 

 

14

----

 

The following table presents the allocation of the allowance for loanlosses to the total amount of loans in each category listed at the datesindicated.

 
| ** **                | ** ** | **December 31,**       | ** ** |
|---------------------------|------------|-----------------------------|------------|
| ** **                | ** ** | **2007**                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                | ** ** | **Amount**                  | ** ** | **% of  Loans   in Each   Category to   Total Loans** | ** ** | **Amount** | ** ** | **% of  Loans   in Each   Category to   Total Loans** | ** ** | **Amount** | ** ** | **% of  Loans   in Each   Category to   Total Loans** | ** ** | **Amount** | ** ** | **% of  Loans  in Each   Category to   Total Loans** | ** ** | **Amount** | ** ** | **% of  Loans   in Each   Category to   Total Loans** | ** ** |
|                      |       | **(Dollars  in Thousands)** |       |
| Single-family residential |       | $                           | 391        |   | 42.92 | % | $ | 445 |   | 45.48 | % | $ | 462 |   | 45.79 | % | $ | 382 |   | 41.74 | % | $ | 348 |   | 40.80 | % |
| Multi-family residential  |       | 17                          |       | 0.64 |   | 25 |   | 0.87 |   | 28 |   | 0.98 |   | 30 |   | 1.17 |   | 26 |   | 1.19 |   |
| Commercial real estate    |       | 1,713                       |       | 47.24 |   | 1,691 |   | 45.39 |   | 1,698 |   | 46.52 |   | 1,706 |   | 48.45 |   | 1,616 |   | 49.31 |   |
| Land and construction     |       | 556                         |       | 5.61 |   | 416 |   | 4.94 |   | 322 |   | 3.26 |   | 332 |   | 4.25 |   | 618 |   | 4.30 |   |
| Consumer                  |       | 8                           |       | 0.91 |   | 9 |   | 1.02 |   | 12 |   | 1.36 |   | 12 |   | 1.70 |   | 11 |   | 1.77 |   |
| Commercial business       |       | 146                         |       | 2.67 |   | 133 |   | 2.30 |   | 149 |   | 2.09 |   | 146 |   | 2.69 |   | 121 |   | 2.63 |   |
| Total                     |       | $                           | 2,831      |   | 100.00 | % | $ | 2,719 |   | 100.00 | % | $ | 2,671 |   | 100.00 | % | $ | 2,608 |   | 100.00 | % | $ | 2,740 |   | 100.00 | % |

 

 

15

----

 

**Investment Activities**

 

**Mortgage-Backed Securities.** Mortgage-backed securities (which also are known as mortgageparticipation certificates or pass-through certificates) represent aparticipation interest in a pool of single-family or multi-family mortgages,the principal and interest payments on which are passed from the mortgageoriginators, through intermediaries (generally U.S. Government agencies andgovernment sponsored enterprises) that pool and repackage the participationinterests in the form of securities, to investors such as the Bank.  Such U.S. Government agencies and governmentsponsored enterprises, which guarantee the payment of principal and interest toinvestors, primarily include the FHLMC, the FNMA and the Government NationalMortgage Association (“GNMA”).

 

TheFHLMC is a public corporation chartered by the U.S. Government.  The FHLMC issues participation certificatesbacked principally by conventional mortgage loans.  The FHLMC guarantees the timely payment ofinterest and the ultimate return of principal within one year.  The FNMA is a private corporation charteredby the U.S. Congress with a mandate to establish a secondary market forconventional mortgage loans.  The FNMAguarantees the timely payment of principal and interest on FNMA securities.  FHLMC and FNMA securities are not backed bythe full faith and credit of the United States, but because the FHLMC and theFNMA are U.S. Government sponsored enterprises, these securities are consideredto be among the highest quality investments with minimal credit risks.  The GNMA is a government agency within theDepartment of Housing and Urban Development which is intended to help financegovernment assisted housing programs. GNMA securities are backed by FHA-insured and VA-guaranteed loans, andthe timely payment of principal and interest on GNMA securities are guaranteedby the GNMA and backed by the full faith and credit of the U.S.Government.  Because the FHLMC, the FNMAand the GNMA were established to provide support for low- and middle-incomehousing, there are limits to the maximum size of loans that qualify for theseprograms.  For example, the FNMA and theFHLMC currently limit their loans secured by a single-family, owner-occupiedresidence to $417,000.  To accommodatelarger-sized loans, and loans that, for other reasons, do not conform to theagency programs, a number of private institutions have established their ownhome-loan origination and securitization programs.

 

Mortgage-backed securities typically are issued with stated principalamounts, and the securities are backed by pools of mortgages that have loanswith interest rates that are within a range and have varying maturities.  The cash flow associated with the underlyingpool of mortgages, i.e., fixed rate or adjustable rate, as well as prepaymentrisk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security thus approximatesthe life of the underlying mortgages.

 

The following table sets forth the fair value of the Bank’s mortgage-backedsecurities portfolio designated as available for sale at the dates indicated.

 
| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                             |       | **(In  Thousands)**   |       |
|                             |       |                  |       |   |   |   |   |
| Mortgage-backed securities:      |       |                  |       |   |   |   |   |
|                             |       |                  |       |   |   |   |   |
| FNMA  pass-through certificates  |       | $                     | 21,060     |   | $ | 26,045 |   | $ | 28,077 |   |
| FHLMC  pass-through certificates |       | 10,872                |       | 13,190 |   | 14,913 |   |
| GNMA  pass-through certificates  |       | 3,700                 |       | 4,401 |   | 5,372 |   |
|                             |       |                  |       |   |   |   |   |
| Total mortgage-backed securities |       | $                     | 35,632     | (1) | $ | 43,636 | (2) | $ | 48,362 | (3) |

----

 

(1)          At December 31,2007, gross unrealized gains on such securities amounted to $267,000 and grossunrealized losses amounted to $232,000.

(2)          At December 31,2006, gross unrealized gains on such securities amounted to $44,000 and grossunrealized losses amounted to $965,000.

(3)          At December 31,2005, gross unrealized gains on such securities amounted to $110,000 and grossunrealized losses amounted to $991,000.

 

 

16

----

 

The following table sets forth the purchases, sales and principalrepayments of the Bank’s mortgage-backed securities for the periods indicated.

 
| ** **                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                 |       | **(In  Thousands)**              |       |
|                                 |       |                             |       |   |   |   |   |
| Mortgage-backed securities purchased |       | $                                | —     |   | $ | 6,451 |   | $ | 26,716 |   |
| Mortgage-backed securities sold      |       | —                           |       | — |   | — |   |
| Principal repayments                 |       | (8,959                           | )          | (11,412 | ) | (8,920 | ) |
| Other, net                           |       | 955                              |       | 235 |   | (931 | ) |
|                                 |       |                             |       |   |   |   |   |
| Net (decrease) increase              |       | $                                | (8,004     | ) | $ | (4,726 | ) | $ | 16,865 |   |

 

Mortgage-backed securities generally increase thequality of the Bank’s assets by virtue of the insurance or guarantees that backthem, are more liquid than individual mortgage loans and may be used tocollateralize borrowings or other obligations of the Bank.  During 2005, the Bank reduced its investmentsin U.S. Government and Agency securities and reinvested these funds primarilyinto 10 year mortgage-backed securities to improve cash flows.  At December 31, 2007, $2.5 million ofthe Bank’s mortgage-backed securities were pledged to secure variousobligations of the Bank.  See Note 4 tothe Consolidated Financial Statements.  The Company doesnot knowingly invest in subprime financial instruments, and hasnot been materially impacted by the current subprime crisis as of December 31,2007.

 

Information regarding the contractual maturities and weighted averageyield of the Bank’s mortgage-backed securities portfolio at December 31,2007 is presented below.

 
| ** **                      | ** ** | **December 31, 2007**  | ** ** |
|---------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **One Year  or Less**       | ** ** | **After One to  Five Years** | ** ** | **After Five  to 15 Years** | ** ** | **Over 15  Years** | ** ** | **Total** | ** ** |
|                            |       | **(Dollars  in Thousands)** |       |
|                            |       |                        |       |   |   |   |   |   |   |   |   |
| FHLMC pass-through certificates |       | $                           | 8          |   | $ | 1 |   | $ | 10,390 |   | $ | 473 |   | $ | 10,872 |   |
| FNMA pass-through certificates  |       | —                      |       | 1,495 |   | 16,949 |   | 2,616 |   | 21,060 |   |
| GNMA pass-through certificates  |       | 3                           |       | — |   | — |   | 3,697 |   | 3,700 |   |
| Total                           |       | $                           | 11         |   | $ | 1,496 |   | $ | 27,339 |   | $ | 6,786 |   | $ | 35,632 | (1) |
|                            |       |                        |       |   |   |   |   |   |   |   |   |
| Weighted average yield          |       | 9.66                        | %          | 5.76 | % | 4.64 | % | 4.92 | % | 4.73 | % |

----

 

(1) All mortgage-backed securities were designated as available forsale.

 

The actual maturity of a mortgage-backed security is less than itsstated maturity due to prepayments of the underlying mortgages.  Prepayments that are faster than anticipatedmay shorten the life of the security and increase or decrease its yield tomaturity if the security was purchased at a discount or premium,respectively.  The yield is based uponthe interest income and the amortization of any premium or discount related tothe mortgage-backed security.  Inaccordance with accounting principles generally accepted in the United Statesof America, premiums and discounts are amortized over the estimated lives ofthe loans, which decrease and increase interest income, respectively.  The prepayment assumptions used to determinethe amortization period for premiums and discounts can significantly affect theyield of the mortgage-backed security, when premiums or discounts are involved,and these assumptions are 

 

 

17

----

 

reviewed periodically to reflect actual prepayments.  Although prepayments of underlying mortgagesdepend on many factors, including the type of mortgages, the coupon rate, theage of mortgages, the geographical location of the underlying real estatecollateralizing the mortgages and general levels of market interest rates, thedifference between the interest rates on the underlying mortgages and theprevailing mortgage interest rates generally is the most significantdeterminant of the rate of prepayments. During periods of falling mortgage interest rates, if the coupon rate ofthe underlying mortgages exceeds the prevailing market interest rates offeredfor mortgage loans, refinancing generally increases and accelerates theprepayment of the underlying mortgages and the related security.  Under such circumstances, the Bank may besubject to reinvestment risk because to the extent that the Bank’smortgage-backed securities amortize or prepay faster than anticipated, the Bankmay not be able to reinvest the proceeds of such repayments and prepayments ata comparable rate.  During periods ofrising interest rates, prepayment of the underlying mortgages generally slowdown when the coupon rate of such mortgages is less than the prevailing marketrate.  The Bank may be subject toextension risk when this occurs.

 

**Investment Securities.** The investment policy of the Bank, as established by the Board ofDirectors, is designed primarily to provide and maintain liquidity and togenerate a favorable return on investments without incurring undue interestrate risk, credit risk, and investment portfolio asset concentrations.  The Bank’s investment policy takes intoaccount the Bank’s business plan, interest rate management, the currenteconomic environment, the types of securities to be held and other safety andsoundness considerations.  The Bank’sinvestment policy is currently implemented by the Chief Executive Officer andreviewed and evaluated by the Asset Liability Committee.  The Asset Liability Committee is required toissue a written compliance report to the Board of Directors at least quarterly.

 

The Bank is authorized to invest in obligationsissued or fully guaranteed by the U.S. Government, certain federal agencyobligations, insured municipal obligations, certain mutual funds, investmentgrade corporate debt securities and other specified investments.  At December 31, 2007, the Bank’sinvestment securities amounted to $67.9 million, of which $45.6 million wasdesignated as available for sale and $22.3 million was designated as held tomaturity.  The Bank has designated themajority of its investment securities as available for sale in order to respondto changes in market rates, increases in loan demand, and changes in liquidityneeds.

 

The following table sets forth certain information relating to the Bank’sinvestment securities portfolio at the dates indicated.

 
| ** **                             | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **Amortized  Cost**   | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
|                                   |       | **(In  Thousands)**   |       |
|                                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government  and agency securities |       | $                     | 26,335     |   | $ | 26,472 |   | $ | 15,990 |   | $ | 15,858 |   | $ | 24,654 |   | $ | 24,654 |   |
|                                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Municipal obligations                  |       | 22,247                |       | 22,827 |   | 24,251 |   | 24,889 |   | 28,181 |   | 28,978 |   |
|                                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Mutual funds                           |       | 19,142                | (2)        | 19,142 | (2) | 20,001 |   | 19,195 |   | 19,244 |   | 19,244 |   |
|                                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Total                                  |       | $                     | 67,724     | (1) | $ | 68,441 | (1) | $ | 60,242 | (1) | $ | 59,942 | (1) | $ | 72,079 |   | $ | 72,876 |   |

----

(1)          At December 31,2007, investment securities totaling $45.6 million were designated as availablefor sale.  At December 31, 2007,gross unrealized losses amounted to $1,000 and there were $139,000 in grossunrealized gains.  At December 31,2007, $8.0 million or 12.8% of the Bank’s investment securities were pledged tosecure various obligations of the Bank. See Note 3 to the Consolidated Financial Statements.

 

(2) Due to the continueddecline in the fair value of the Company’s investment in its $20 million mutualfunds portfolio, the Company has identified the impairment of these securitiesas other than temporary and has recorded a charge against operating results of$860,000 as of December 31, 2007.

 

 

 

18

----

 

Information regarding the contractual maturities and weighted averageyield of the Bank’s investment securities portfolio at December 31, 2007is presented below.  Actual maturitiesmay differ from contractual maturities because issuers may have the right tocall or prepay obligations with or without call or prepayment penalties.

 
| ** **                             | ** ** | **At December 31, 2007** | ** ** |
|----------------------------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **One Year or  Less**         | ** ** | **After One to  Five Years** | ** ** | **After Five to  10 Years** | ** ** | **Over  10 Years** | ** ** | **Total** | ** ** |
|                                   |       | **(Dollars  in Thousands)**   |       |
|                                   |       |                          |       |   |   |   |   |   |   |   |   |
| U.S. Government  and agency securities |       | $                             | 999        |   | $ | 13,069 |   | $ | 9,054 |   | $ | 3,350 |   | $ | 26,472 | (1) |
| Municipal obligations                  |       | —                        |       | — |   | 5,459 |   | 17,368 |   | 22,827 | (2) |
| Mutual funds                           |       | 19,142                        |       | — |   | — |   | — |   | 19,142 | (3) |
|                                   |       |                          |       |   |   |   |   |   |   |   |   |
| Total                                  |       | $                             | 20,141     |   | $ | 13,069 |   | $ | 14,513 |   | $ | 20,718 |   | $ | 68,441 |   |
|                                   |       |                          |       |   |   |   |   |   |   |   |   |
| Weighted average yield                 |       | 4.75                          | %          | 5.02 | % | 4.54 | % | 4.72 | % | 4.88 | % |

----

(1) The $26.5 million of U.S. Government agency securities aredesignated as available for sale.

(2) The $22.8 million of municipal obligations are designated asheld to maturity and exempt.

(3) The $19.1 million of mutual funds aredesignated as available for sale.

 

**Sources of Funds**

 

**General**.  Deposits are theprimary source of the Bank’s funds for lending and other investmentpurposes.  In addition to deposits, theBank derives funds from loan principal repayments, prepayments and advancesfrom the Federal Home Loan Bank (“FHLB”) of Pittsburgh.  Loan repayments are a relatively stablesource of funds, while deposit inflows and outflows are significantlyinfluenced by general interest rates and money market conditions.  Borrowings may be used on a short-term basisto compensate for reductions in the availability of funds from othersources.  They may also be used on alonger term basis for general business purposes.

 

**Deposits**.  The Bank’sdeposit products include a broad selection of deposit instruments, includingNOW accounts, money market accounts, regular savings accounts and termcertificate accounts.  Deposit accountterms vary, with the principal difference being the minimum balance required,the time periods the funds must remain on deposit and the interest rate.

 

The Bank considers its primary market area to be Delaware and Chestercounties, Pennsylvania.  The Bankattracts deposit accounts by offering a wide variety of accounts, competitiveinterest rates, and convenient office locations and service hours.  In addition, the Bank maintains automatedteller machines at its Broomall, Glen Mills, Havertown, Springfield, Lansdowne,Paoli, and Secane offices.  The Bankutilizes traditional marketing methods to attract new customers and savingsdeposits, including print media advertising and direct mailings.  The Bank does not advertise for depositsoutside of its primary market area or utilize the services of deposit brokers,and management believes that an insignificant number of deposit accounts wereheld by non-residents of Pennsylvania at December 31, 2007.

 

The Bank has been competitive in the types of accounts and in interestrates it has offered on its deposit products but does not necessarily seek tomatch the highest rates paid by competing institutions.  Although market demand generally dictateswhich deposit maturities and rates will be accepted by the public, the Bankintends to continue to promote longer term deposits to the extent possible andconsistent with its asset and liability management goals.

 

 

 

19

----

 

The following table shows the distribution of, and certain otherinformation relating to, the Bank’s deposits by type of deposit as of the datesindicated.

 
| ** **                               | ** ** | **December 31,**       | ** ** |
|------------------------------------------|------------|-----------------------------|------------|
| ** **                               | ** ** | **2007**                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **Amount**                  | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
|                                     |       | **(Dollars  in Thousands)** |       |
|                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Passbook and  statement savings accounts |       | $                           | 38,223     |   | 11.56 | % | $ | 43,512 |   | 13.04 | % | $ | 54,869 |   | 18.43 | % |
| Money market accounts                    |       | 25,105                      |       | 7.59 |   | 24,255 |   | 7.27 |   | 23,837 |   | 8.01 |   |
| Certificates of deposit                  |       | 201,860                     |       | 60.90 |   | 200,228 |   | 59.98 |   | 167,580 |   | 56.29 |   |
| NOW and Super  NOW accounts              |       | 48,760                      |       | 12.81 |   | 43,859 |   | 13.13 |   | 33,335 |   | 11.19 |   |
| Non-interest  bearing accounts           |       | 16,840                      |       | 7.14 |   | 21,948 |   | 6.58 |   | 18,089 |   | 6.08 |   |
|                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total deposits  at end of year           |       | $                           | 330,788    |   | 100.00 | % | $ | 333,802 |   | 100.00 | % | $ | 297,710 |   | 100.00 | % |

 

The following table sets forth the net deposit flows of the Bank duringthe periods indicated.

 

| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                         |       | **(In  Thousands)**              |       |
|                                         |       |                             |       |   |   |   |   |
| (Decrease) increase before interest credited |       | $                                | (14,632    | ) | $ | 28,552 |   | $ | 5,138 |   |
| Interest credited                            |       | 11,618                           |       | 8,350 |   | 5,666 |   |
| Net deposit (decrease) increase              |       | $                                | (3,014     | ) | $ | 36,902 |   | $ | 10,804 |   |

 

The following table sets forth maturities of the Bank’s certificates ofdeposit of $100,000 or more at December 31, 2007 by time remaining tomaturity.

 

|                                  |   | **Amounts  in  Thousands** |   |
|---------------------------------------|--------|----------------------------|--------|
|                                  |   |                       |   |
| Three months or less                  |   | $                          | 8,902  |   |
| Over three months through six months  |   | 15,242                     |   |
| Over six months through twelve months |   | 8,446                      |   |
| Over twelve months                    |   | 3,759                      |   |
| Total                                 |   | $                          | 36,349 |   |

 

 

 

20

----

 

The followingtable presents the average balance of each deposit type and the average ratepaid on each deposit type for the periods indicated.

 
| ** **                               | ** ** | **December 31,**       | ** ** |
|------------------------------------------|------------|-----------------------------|------------|
| ** **                               | ** ** | **2007**                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **Average Balance**         | ** ** | **Average  Rate  Paid** | ** ** | **Average  Balance** | ** ** | **Average  Rate  Paid** | ** ** | **Average**

**Balance** | ** ** | **Average  Rate  Paid** | ** ** |
|                                     |       | **(Dollars  in Thousands)** |       |
|                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Passbook and  statement Savings accounts |       | $                           | 38,212     |   | .75 | % | $ | 49,215 |   | .75 | % | $ | 59,020 |   | .75 | % |
| Money market accounts                    |       | 25,105                      |       | 2.75 |   | 23,158 |   | 1.67 |   | 25,425 |   | 1.01 |   |
| Certificates of deposit                  |       | 201,860                     |       | 4.73 |   | 173,547 |   | 3.90 |   | 157,738 |   | 2.87 |   |
| NOW and Super NOW                        |       | 48,771                      |       | 2.66 |   | 39,848 |   | 2.05 |   | 35,324 |   | 1.24 |   |
| Non-interest bearing accounts            |       | 16,840                      |       | — |   | 17,699 |   | — |   | 17,291 |   | — |   |
| Total average  deposits                  |       | $                           | 330,788    |   | 3.75 | % | $ | 303,467 |   | 2.92 | % | $ | 294,798 |   | 2.04 | % |

 

The following table presents, by various interest ratecategories, the amount of certificates of deposit at December 31, 2007 and2006 and the amounts at December 31, 2007, which mature during the periodsindicated.

 
| ** **                        | ** ** | **December 31,** | ** ** | **Amounts at December 31, 2007  Maturing Within** | ** ** |
|-----------------------------------|------------|-----------------------|------------|--------------------------------------------------------|------------|
| **Certificates of  Deposit** | ** ** | **2007**              | ** ** | **2006**                                               | ** ** | **One Year** | ** ** | **Two Years** | ** ** | **Three Years** | ** ** | **Thereafter** | ** ** |
|                              |       | **(In  Thousands)**   |       |
|                              |       |                  |       |                                                   |       |   |   |   |   |   |   |   |   |
| 2.0% or less                      |       | $                     | —     |                                                   | $          | 192 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| 2.01% to 4.0%                     |       | 11,440                |       | 32,874                                                 |       | 8,152 |   | 1,598 |   | 1,199 |   | 271 |   |
| 4.01% to 6.0%                     |       | 190,420               |       | 167,162                                                |       | 173,691 |   | 6,572 |   | 4,281 |   | 6,096 |   |
| Total certificates of deposit     |       | $                     | 201,860    |                                                   | $          | 200,228 |   | $ | 181,843 |   | $ | 8,170 |   | $ | 5,480 |   | $ | 6,367 |   |

 

**Borrowings**. The Bank may obtain advances from the FHLB of Pittsburgh upon thesecurity of the common stock it owns in that bank and certain of its loans,provided certain standards related to creditworthiness have been met. Suchadvances are made pursuant to several credit programs, each of which has itsown interest rate and range of maturities. Such advances are generally available to meet seasonal and otherwithdrawals of deposit accounts and to permit increased lending.  At December 31, 2007, the Bank had $37.0million of advances from the FHLB of Pittsburgh.  Of the $37.0 million of FHLB advances at December 31,2007, $5.0 million is due in 2009 and $32.0 million is due in 2010.  There are prepayment penalties associatedwith substantially all of the Bank’s FHLB advances.  The weighted average interest rate of theBank’s FHLB advances was 6.30% as of December 31, 2007.

 

 

21

----

 

The followingtable sets forth certain information regarding borrowed funds at or for thedates indicated:

 

| ** **                                                   | ** ** | **At or for the Year Ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                   | ** ** | **2007**                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                         |       | **(Dollars  in Thousands)**                    |       |
|                                                         |       |                                           |       |   |   |   |   |
| FHLB of Pittsburgh advances:                                 |       |                                           |       |   |   |   |   |
| Average balance  outstanding                                 |       | $                                              | 37,153     |   | $ | 47,684 |   | $ | 52,823 |   |
| Maximum amount  outstanding at any month-end during the year |       | 37,170                                         |       | 52,182 |   | 56,192 |   |
| Balance  outstanding at end of year                          |       | 37,000                                         |       | 37,173 |   | 52,182 |   |
| Weighted average  interest rate during the year              |       | 6.37                                           | %          | 6.21 | % | 6.12 | % |
| Weighted average  interest rate at end of period             |       | 6.30                                           | %          | 6.30 | % | 6.10 | % |
|                                                         |       |                                           |       |   |   |   |   |
| Total borrowings:                                            |       |                                           |       |   |   |   |   |
| Average balance  outstanding                                 |       | $                                              | 37,356     |   | $ | 47,990 |   | $ | 53,116 |   |
| Maximum amount  outstanding at any month-end during the year |       | 38,975                                         |       | 52,639 |   | 56,464 |   |
| Balance  outstanding at end of year                          |       | 37,042                                         |       | 37,210 |   | 53,116 |   |
| Weighted average  interest rate during the year              |       | 6.37                                           | %          | 6.21 | % | 6.10 | % |
| Weighted average  interest rate at end of year               |       | 6.34                                           | %          | 6.29 | % | 6.08 | % |

 

**Employees**

 

The Bank had 71full-time employees and 27 part-time employees at December 31, 2007.  None of these employees is represented by acollective bargaining agent, and the Bank believes that it enjoys goodrelations with its personnel.

 

**Subsidiaries**

 

Presently, theBank has two wholly-owned subsidiaries, Alliance Delaware Corp., which holdsand manages certain investment securities and Alliance Financial and InvestmentServices LLC which participates in commission fees. Alliance Delaware Corp. wasformed in 1999 to accommodate the transfer of certain assets that are legalinvestments for the Bank and to provide for a greater degree of protection toclaims of creditors. The laws of the State of Delaware and the court systemcreate a more favorable environment for the business affairs of the subsidiary.  Alliance Delaware Corp. currently managescertain investments for the Bank, which, as of December 31, 2007, amountedto $53.8 million.  Alliance Financial andInvestment Services LLC was established in 2003 to share in commission feesfrom non-insured alternative investment products.

 

**Competition**

 

The Bank facesstrong competition both in attracting deposits and making real estateloans.  Its most direct competition fordeposits has historically come from other savings associations, credit unionsand commercial banks located in eastern Pennsylvania, including many largefinancial institutions, which have greater financial and marketing resourcesavailable to them.  In addition, duringtimes of high interest rates, the Bank has faced additional significantcompetition for investors’ funds from short-term money market securities,mutual funds and other corporate and government securities.  The ability of the Bank to attract and retainsavings deposits depends on its ability to generally provide a rate of return,liquidity and risk comparable to that offered by competing investmentopportunities.

 

The Bankexperiences strong competition for real estate loans principally from othersavings associations, commercial banks and mortgage banking companies.  The Bank competes for loans principallythrough the interest rates and loan fees it charges and the efficiency andquality of services it provides borrowers. Competition may increase as a result of the continuing reduction ofrestrictions on the interstate operations of financial institutions.

 

 

 

22

----

 

**                                                                                           REGULATION**

 

**General.** Alliance Bancorp and Alliance Mutual Holding Company, asfederally-chartered savings and loan holding companies, are required to filecertain reports with, and are subject to examination by, and otherwise mustcomply with the rules and regulations of the Office of Thrift Supervision.Alliance Bancorp is also subject to the rules and regulations of theSecurities and Exchange Commission under the federal securities laws.

 

Alliance Bank is aPennsylvania-chartered savings bank and is subject to extensive regulation andexamination by the Pennsylvania Department of Banking and by the FDIC, and isalso subject to certain requirements established by the Federal ReserveBoard.  The federal and state laws andregulations which are applicable to banks regulate, among other things, thescope of their business, their investments, their reserves against deposits,the timing of the availability of deposited funds and the nature and amount ofand collateral for certain loans.  Thereare periodic examinations by the Pennsylvania Department of Banking and theFDIC to test Alliance Bank’s compliance with various regulatoryrequirements.  This regulation and supervisionestablishes a comprehensive framework of activities in which an institution canengage and is intended primarily for the protection of the insurance fund anddepositors.  The regulatory structurealso gives the regulatory authorities extensive discretion in connection withtheir supervisory and enforcement activities and examination policies,including policies with respect to the classification of assets and theestablishment of adequate loan loss reserves for regulatory purposes.  Any change in such regulation, whether by thePennsylvania Department of Banking, the FDIC or the Congress could have amaterial adverse impact on Alliance Bancorp, Alliance Bank and Alliance MutualHolding Company and their operations.

 

Certain of the statutoryand regulatory requirements that are applicable to Alliance Bank, AllianceBancorp and Alliance Mutual Holding Company are described below.  This description of statutes and regulationsis not intended to be a complete explanation of such statutes and regulationsand their effects on Alliance Bank, Alliance Bancorp and Alliance MutualHolding Company and is qualified in its entirety by reference to the actualstatutes and regulations.

 

**Regulation of Alliance Bank**

 

**Pennsylvania Banking Law.** The Pennsylvania Banking Code of 1965 (the “Banking Code”) containsdetailed provisions governing the organization, location of offices, rights andresponsibilities of directors, officers, employees and members, as well ascorporate powers, savings and investment operations and other aspects ofAlliance Bank and its affairs.  TheBanking Code delegates extensive rulemaking power and administrative discretionto the Department so that the supervision and regulation of state-charteredsavings banks may be flexible and readily responsive to changes in economicconditions and in savings and lending practices.

 

One of the purposes ofthe Banking Code is to provide savings banks with the opportunity to becompetitive with each other and with other financial institutions existingunder other Pennsylvania laws and other state, federal and foreign laws.  A Pennsylvania savings bank may locate orchange the location of its principal place of business and establish an officeanywhere in the Commonwealth, with the prior approval of the Department.

 

The Department generallyexamines each savings bank not less frequently than once every two years.  Although the Department may accept theexaminations and reports of the FDIC in lieu of its own examination, the presentpractice is for the Department to conduct individual examinations.  The Department may order any savings bank todiscontinue any violation of law or unsafe or unsound business practice and maydirect any trustee, officer, attorney or employee of a savings bank engaged inan objectionable activity, after the Department has ordered the activity to beterminated, to show cause at a hearing before the Department why such personshould not be removed.

 

**Insuranceof Accounts.**  The deposits of Alliance Bank are insured tothe maximum extent permitted by the Deposit Insurance Fund, administered by theFDIC, and are backed by the full faith and credit of the U.S. Government.  As insurer, the FDIC is authorized to conductexaminations of, and to require reporting by, insured institutions.  It also may prohibit any insured institutionfrom engaging in any activity determined by regulation or order to pose aserious threat to the FDIC.

 

Each FDIC-insuredinstitution is assigned to one of three capital groups which are based solelyon the level of an institution’s capitalB“well capitalized,” “adequately capitalized,” and “undercapitalized.”  These capital levels are defined in the samemanner as under the prompt corrective action system discussed below.  These three groups are then divided intothree subgroups which reflect varying levels of supervisory concern, from thosewhich are considered to be healthy to those which are considered to be ofsubstantial supervisory concern. Assessment rates for insured institutions are determined semi-annuallyby the FDIC and currently range from zero basis points for well-capitalizedhealthy institutions, to 27 basis points for undercapitalized institutions withsubstantial supervisory concerns. Alliance Bank currently is considered well capitalized and has a zero assessmentrate.

 

 

 

23

----

 

In addition, allinstitutions with deposits insured by the FDIC are required to pay assessmentsto fund interest payments on bonds issued by the Financing Corporation, amixed-ownership government corporation established to recapitalize thepredecessor to the Savings Association Insurance Fund.  The assessment rate for the third quarter of 2007 was 0.0144% ofinsured deposits and is adjusted quarterly. These assessments will continue until the Financing Corporation bondsmature in 2019.

 

The FDIC may terminatethe deposit insurance of any insured depository institution, including AllianceBank, if it determines after a hearing that the institution has engaged or isengaging in unsafe or unsound practices, is in an unsafe or unsound conditionto continue operations, or has violated any applicable law, regulation, orderor any condition imposed by an agreement with the FDIC.  It also may suspend deposit insurancetemporarily during the hearing process for the permanent termination ofinsurance, if the institution has no tangible capital.  If insurance of accounts is terminated, theaccounts at the institution at the time of the termination, less subsequentwithdrawals, shall continue to be insured for a period of six months to twoyears, as determined by the FDIC. Management is aware of no existing circumstances which would result intermination of Alliance Bank’s deposit insurance.

 

**Deposit Insurance Reform.** On February 8, 2006, President George W.Bush signed into law legislation that merged the Bank Insurance Fund and theSavings Association Insurance Fund to form the Deposit Insurance Fund,eliminated any disparities in bank and thrift risk-based premium assessments,reduced the administrative burden of maintaining and operating two separatefunds and established certain new insurance coverage limits and a mechanism forpossible periodic increases.  Thelegislation also gave the FDIC greater discretion to identify the relativerisks all institutions present to the Deposit Insurance Fund and set risk-basedpremiums.

 

Major provisions in thelegislation include:

 

·                  mergingthe Savings Association Insurance Fund and Bank Insurance Fund, which becameeffective March 31, 2006;

 

·                  maintainingbasic deposit and municipal account insurance coverage at $100,000 butproviding for a new basic insurance coverage for retirement accounts of$250,000.  Insurance coverage for basicdeposit and retirement accounts could be increased for inflation every fiveyears in $10,000 increments beginning in 2011;

 

·                  providingthe FDIC with the ability to set the designated reserve ratio within a range ofbetween 1.15% and 1.50%, rather than maintaining 1.25% at all times regardlessof prevailing economic conditions;

 

·                  providinga one-time assessment credit of $4.7 billion to banks and savings associationsin existence on December 31, 1996, which may be used to offset futurepremiums with certain limitations; and

 

·                  requiring the payment of dividends of 100% of the amount that theinsurance fund exceeds 1.5% of the estimated insured deposits and the paymentof 50% of the amount that the insurance fund exceeds 1.35% of the estimatedinsured deposits (when the reserve is greater than 1.35% but no more than1.5%).

 

Pursuant to the ReformAct, the FDIC has determined to maintain the designated reserve ratio at itscurrent 1.25%, which will be reviewed annually. The FDIC has also adopted a new risk-based premium system that providesfor quarterly assessments based on an insured institution’s ranking in one offour risk categories based upon supervisory and capital evaluations. Beginningin 2007, well-capitalized institutions (generally those with CAMELS compositeratings of 1 or 2) will be grouped in Risk Category I and will be assessed fordeposit insurance at an annual rate of between five and seven basispoints.  The assessment rate for anindividual institution is determined according to a formula based on a weightedaverage of the institution’s individual CAMEL component ratings plus eitherfive financial ratios or, in the case of an institution with assets of $10.0billion or more, the average ratings of its long-term debt.  Institutions in Risk Categories II, IIIand IV will be assessed at annual rates of 10, 28 and 43 basis points,respectively.

 

**Capital Requirements.** The FDIC has promulgated regulations and adopted a statement of policyregarding the capital adequacy of state-chartered banks which, like AllianceBank, are not members of the Federal Reserve System.  These requirements are substantially similarto those adopted by the Federal Reserve Board regarding bank holding companies.

 

The FDIC’s capitalregulations establish a minimum 3.0% Tier I leverage capital requirement forthe most highly-rated state-chartered, non-member banks, with an additionalcushion of at least 100 to 200 basis points for all other state-chartered,non-member banks, which effectively will increase the minimum Tier I leverageratio for such other banks to 4.0% to 5.0% or more.  Under the FDIC’s regulation, highest-ratedbanks are those that the FDIC determines are not anticipating or experiencingsignificant growth and have well diversified risk, including no undue interestrate risk exposure, excellent asset quality, high liquidity, good earnings and,in general, which are considered a strong banking organization and are ratedcomposite 1 under the Uniform Financial Institutions Rating System.  Leverage or core capital is defined as thesum of common stockholders’ equity (including retained earnings), noncumulativeperpetual preferred stock and related surplus, and minority interests inconsolidated subsidiaries, minus all intangible assets other than certainqualifying supervisory goodwill and certain purchased mortgage servicingrights.

 

24

----

 

The FDIC also requiresthat savings banks meet a risk-based capital standard.  The risk-based capital standard for savingsbanks requires the maintenance of total capital (which is defined as Tier Icapital and supplementary (Tier 2) capital) to risk weighted assets of 8%.  In determining the amount of risk-weightedassets, all assets, plus certain off balance sheet assets, are multiplied by arisk-weight of 0% to 100%, based on the risks the FDIC believes are inherent inthe type of asset or item.  Thecomponents of Tier I capital are equivalent to those discussed above under the3% leverage capital standard.  Thecomponents of supplementary capital include certain perpetual preferred stock,certain mandatory convertible securities, certain subordinated debt andintermediate preferred stock and general allowances for loan and leaselosses.  Allowance for loan and leaselosses includable in supplementary capital is limited to a maximum of 1.25% ofrisk-weighted assets.  Overall, theamount of capital counted toward supplementary capital cannot exceed 100% ofcore capital.

 

Alliance Bank is alsosubject to more stringent Department capital guidelines.  Although not adopted in regulation form, theDepartment utilizes capital standards requiring a minimum of 6% leveragecapital and 10% risk-based capital.  Thecomponents of leverage and risk-based capital are substantially the same asthose defined by the FDIC.

 

At December 31,2007, Alliance Bank’s capital ratios exceeded each of its capital requirements.

 

**Activities and Investments ofInsured State-Chartered Banks.**  The activitiesand equity investments of FDIC-insured, state-chartered banks are generallylimited to those that are permissible for national banks.  Under regulations dealing with equityinvestments, an insured state bank generally may not directly or indirectlyacquire or retain any equity investment of a type, or in an amount, that is notpermissible for a national bank.  Aninsured state bank is not prohibited from, among other things:

 

·                  acquiring or retaining a majority interest in a subsidiary;

 

·                  investing as a limited partner in a partnership the sole purpose ofwhich is direct or indirect investment in the acquisition, rehabilitation ornew construction of a qualified housing project, provided that such limitedpartnership investments may not exceed 2% of the bank’s total assets;

 

·                  acquiring up to 10% of the voting stock of a company that solelyprovides or reinsures directors’, trustees’ and officers’ liability insurancecoverage or bankers’ blanket bond group insurance coverage for insureddepository institutions; and

 

·                  acquiring or retaining the voting shares of a depository institution ifcertain requirements are met.

 

The FDIC has adoptedregulations pertaining to the other activity restrictions imposed upon insuredstate banks and their subsidiaries. Pursuant to such regulations, insured state banks engaging inimpermissible activities may seek approval from the FDIC to continue suchactivities.  State banks not engaging insuch activities but that desire to engage in otherwise impermissible activitieseither directly or through a subsidiary may apply for approval from the FDIC todo so; however, if such bank fails to meet the minimum capital requirements orthe activities present a significant risk to the FDIC insurance funds, suchapplication will not be approved by the FDIC. Pursuant to this authority, the FDIC has determined that investments incertain majority-owned subsidiaries of insured state banks do not represent asignificant risk to the deposit insurance funds.  Investments permitted under that authorityinclude real estate activities and securities activities.

 

**Restrictions on Capital Distributions****.** Office of Thrift Supervision regulations govern capital distributionsby savings institutions, which include cash dividends, stock repurchases andother transactions charged to the capital account of a savings institution tomake capital distributions.  Theseregulations apply to Alliance Mutual Holding Company and Alliance Bancorp.  Under applicable regulations, a savingsinstitution must file an application for Office of Thrift Supervision approvalof the capital distribution if:

 

·                  the total capital distributions for the applicablecalendar year exceed the sum of the institution’s net income for that year todate plus the institution’s retained net income for the preceding two years;

 

·                  the institution would not be at least adequatelycapitalized following the distribution;

 

·                  the distribution would violate any applicable statute,regulation, agreement or Office of Thrift Supervision-imposed condition; or

 

 

 

25

----

 

·                  the institution is not eligible for expeditedtreatment of its filings with the Office of Thrift Supervision.

 

If an applicationis not required to be filed, savings institutions such as Alliance Bank whichare a subsidiary of a holding company (as well as certain other institutions)must still file a notice with the Office of Thrift Supervision at least 30 daysbefore the board of directors declares a dividend or approves a capitaldistribution.

 

An institution thateither before or after a proposed capital distribution fails to meet its thenapplicable minimum capital requirement or that has been notified that it needsmore than normal supervision may not make any capital distributions without theprior written approval of the Office of Thrift Supervision.  In addition, the Office of Thrift Supervisionmay prohibit a proposed capital distribution, which would otherwise bepermitted by Office of Thrift Supervision regulations, if the Office of ThriftSupervision determines that such distribution would constitute an unsafe orunsound practice.

 

The FDIC prohibits aninsured depository institution from paying dividends on its capital stock orinterest on its capital notes or debentures (if such interest is required to bepaid only out of net profits) or distributing any of its capital assets whileit remains in default in the payment of any assessment due the FDIC.  Alliance Bank is currently not in default inany assessment payment to the FDIC.

 

**Privacy Requirements of theGramm-Leach-Bliley Act.**  The Gramm-Leach-Bliley Act of1999 provided for sweeping financial modernization for commercial banks,savings banks, securities firms, insurance companies, and other financialinstitutions operating in the United States. Among other provisions, the Gramm-Leach-Bliley Act places limitations onthe sharing of consumer financial information with unaffiliated thirdparties.  Specifically, theGramm-Leach-Bliley Act requires all financial institutions offering financialproducts or services to retail customers to provide such customers with thefinancial institution’s privacy policy and provide such customers theopportunity to “opt out” of the sharing of personal financial information withunaffiliated third parties.  Alliance Bankcurrently has a privacy protection policy in place and believes such policy isin compliance with the regulations.

 

**Anti-Money Laundering.** On October 26, 2001, in response to the events of September 11,2001, the President of the United States signed into law the Uniting andStrengthening America by Providing Appropriate Tools Required to Intercept andObstruct Terrorism Act of 2001 (referred to as the USA PATRIOT Act).  The USA PATRIOT Act significantly expands theresponsibilities of financial institutions, including savings and loanassociations, in preventing the use of the U.S. financial system to fundterrorist activities.  Title III of theUSA PATRIOT Act provides for a significant overhaul of the U.S. anti-moneylaundering regime.  Among other provisions,it requires financial institutions operating in the United States to developnew anti-money laundering compliance programs, due diligence policies andcontrols to ensure the detection and reporting of money laundering. Suchcompliance programs are intended to supplement existing compliancerequirements, also applicable to financial institutions, under the Bank SecrecyAct and the Office of Foreign Assets Control Regulations.  Alliance Bank has established policies andprocedures to ensure compliance with the USA PATRIOT Act’s provisions.

 

**Regulatory Enforcement Authority.** Applicable banking laws include substantial enforcement powers availableto federal banking regulators.  Thisenforcement authority includes, among other things, the ability to assess civilmoney penalties, to issue cease-and-desist or removal orders and to initiateinjunctive actions against banking organizations and institution-affiliatedparties, as defined.  In general, theseenforcement actions may be initiated for violations of laws and regulations andunsafe or unsound practices.  Otheractions or inactions may provide the basis for enforcement action, includingmisleading or untimely reports filed with regulatory authorities.

 

**Regulation of Alliance Bancorpand Alliance Mutual Holding Company**

 

**General.**  Alliance Bancorp and Alliance Mutual HoldingCompany are subject to regulation as savings and loan holding companies underthe Home Owners’ Loan Act, as amended, instead of being subject to regulationas bank holding companies under the Bank Holding Company Act of 1956 becauseAlliance Bank has made an election under Section 10(l) of the HomeOwners’ Loan Act to be treated as a “savings association” for purposes of Section 10of the Home Owners’ Loan Act.  As aresult, Alliance Bancorp and Alliance Mutual Holding Company registered withthe Office of Thrift Supervision and are subject to Office of ThriftSupervision regulations, examinations, supervision and reporting requirementsrelating to savings and loan holding companies. As a subsidiary of a savings and loan holding company, Alliance Bank issubject to certain restrictions in its dealings with Alliance Bancorp andAlliance Mutual Holding Company and affiliates thereof.

 

**Restrictions Applicable toAlliance Bancorp and Alliance Mutual Holding Company.** Because Alliance Bancorp and Alliance Mutual Holding Company operateunder federal charters issued by the Office of Thrift Supervision under Section 10(o) ofthe Home Owners’ Loan Act, they are permitted to engage only in the followingactivities:

 

 

 

26

----

 

·                  investing in the stock of a savingsinstitution;

 

·                  acquiring a mutual association throughthe merger of such association into a savings institution subsidiary of suchholding company or an interim savings institution subsidiary of such holdingcompany;

 

·                  merging with or acquiring another holdingcompany, one of whose subsidiaries is a savings institution;

 

·                  investing in a corporation the capitalstock of which is available for purchase by a savings institution under federallaw or under the law of any state where the subsidiary savings institution orassociation is located; and

 

·                  the permissible activities describedbelow for non-grandfathered savings and loan holding companies.

 

Activities which arepermissible for non-grandfathered savings and loan holding companies include:

 

·                  furnishing or performing managementservices for a subsidiary savings institution;

 

·                  conducting an insurance agency or escrowbusiness;

 

·                  holding, managing, or liquidating assetsowned or acquired from a subsidiary savings institution;

 

·                  holding or managing properties used oroccupied by a subsidiary savings institution;

 

·                  acting as trustee under a deed of trust;

 

·                  any other activity (i) that theFederal Reserve Board, by regulation, has determined to be permissible for bankholding companies under Section 4(c) of the Bank Holding Company Actof 1956, unless the Director of the Office of Thrift Supervision, byregulation, prohibits or limits any such activity for savings and loan holdingcompanies, or (ii) in which multiple savings and loan holding companieswere authorized by regulation to directly engage in on March 5, 1987;

 

·                  purchasing, holding, or disposing ofstock acquired in connection with a qualified stock issuance if the purchase ofsuch stock by such holding company is approved by the Director of the Office ofThrift Supervision; and

 

·                  any activity permissible for financialholding companies under section 4(k) of the Bank Holding Company Act.

 

Permissible activitieswhich are deemed to be financial in nature or incidental thereto under section4(k) of the Bank Holding Company Act include:

 

·                  lending, exchanging, transferring,investing for others, or safeguarding money or securities;

 

·                  insurance activities or providing andissuing annuities, and acting as principal, agent, or broker;

 

·                  financial, investment, or economicadvisory services;

 

·                  issuing or selling instrumentsrepresenting interests in pools of assets that a bank is permitted to holddirectly;

 

·                  underwriting, dealing in, or making amarket in securities;

 

·                  activities previously determined by theFederal Reserve Board to be closely related to banking;

 

·                  activities that bank holding companiesare permitted to engage in outside of the U.S.; and

 

·                  portfolio investments made by aninsurance company.

 

In addition, AllianceBancorp is not permitted to be acquired unless the acquirer is engaged solelyin financial activities or to acquire a company unless the company is engagedsolely in financial activities.

 

 

 

27

----

 

If a mutual holdingcompany or a mutual holding company subsidiary holding company acquires or mergeswith another holding company, the holding company acquired or the holdingcompany resulting from such merger or acquisition may only invest in assets andengage in the activities listed above, and it has a period of two years tocease any non-conforming activities and divest any non-conforminginvestments.  As of the date hereof,Alliance Mutual Holding Company was not engaged in any non-conformingactivities and it did not have any non-conforming investments.

 

If the subsidiarysavings institution fails to meet the Qualified Thrift Lender test set forth inSection 10(m) of the Home Owners’ Loan Act, as discussed below, thenthe savings and loan holding company must register with the Federal ReserveBoard as a bank holding company, unless the savings institution requalifies asa Qualified Thrift Lender within one year thereafter.

 

**Qualified Thrift Lender Test.**  Under Section 2303 of the EconomicGrowth and Regulatory Paperwork Reduction Act of 1996, a savings associationcan comply with the Qualified Thrift Lender test by either meeting theQualified Thrift Lender test set forth in the Home Owners’ Loan Act andimplementing regulations or qualifying as a domestic building and loanassociation as defined in Section 7701(a)(19) of the Internal Revenue Codeof 1986, as amended.  A savings banksubsidiary of a savings and loan holding company that does not comply with theQualified Thrift Lender test must comply with the following restrictions on itsoperations:

 

·                  theinstitution may not engage in any new activity or make any new investment,directly or indirectly, unless such activity or investment is permissible for anational bank;

 

·                  thebranching powers of the institution shall be restricted to those of a nationalbank; and

 

·                  paymentof dividends by the institution shall be subject to the rules regardingpayment of dividends by a national bank.

 

Upon the expiration ofthree years from the date the institution ceases to meet the Qualified ThriftLender test, it must cease any activity and not retain any investment notpermissible for a national bank (subject to safety and soundnessconsiderations).

 

Alliance Bank believesthat it meets the provisions of the Qualified Thrift Lender test.

 

**Limitationson Transactions with Affiliates.**  Transactionsbetween savings institutions and any affiliate are governed by Sections 23A and23B of the Federal Reserve Act.  Anaffiliate of a savings institution is any company or entity which controls, iscontrolled by or is under common control with the savings institution.  In a mutual holding company context, themutual holding company and mid-tier holding company of a savings institution(such as Alliance Bancorp and Alliance Mutual Holding Company) and anycompanies which are controlled by such holding companies are affiliates of thesavings institution.  Generally, Section 23Alimits the extent to which the savings institution or its subsidiaries mayengage in “covered transactions” with any one affiliate to an amount equal to10% of such institution’s capital stock and surplus, and contain an aggregatelimit on all such transactions with all affiliates to an amount equal to 20% ofsuch capital stock and surplus.  Section 23Bapplies to “covered transactions” as well as certain other transactions andrequires that all transactions be on terms substantially the same, or at leastas favorable, to the savings institution as those provided to anon-affiliate.  The term “coveredtransaction” includes the making of loans to, purchase of assets from andissuance of a guarantee to an affiliate and similar transactions.  Section 23B transactions also includethe provision of services and the sale of assets by a savings institution to anaffiliate.  In addition to therestrictions imposed by Sections 23A and 23B, Section 11 of the Home Owners’Loan Act prohibits a savings institution from (i) making a loan or otherextension of credit to an affiliate, except for any affiliate which engagesonly in certain activities which are permissible for bank holding companies, or(ii) purchasing or investing in any stocks, bonds, debentures, notes orsimilar obligations of any affiliate, except for affiliates which aresubsidiaries of the savings institution.

 

In addition, Sections 22(g) and(h) of the Federal Reserve Act place restrictions on loans to executiveofficers, directors and principal stockholders. Under Section 22(h), loans to a director, an executive officer andto a greater than 10% stockholder of a savings institution, and certainaffiliated interests of either, may not exceed, together with all otheroutstanding loans to such person and affiliated interests, the savingsinstitution’s loans to one borrower limit (generally equal to 15% of theinstitution’s unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executiveofficers and principal stockholders be made on terms substantially the same asoffered in comparable transactions to other persons unless the loans are madepursuant to a benefit or compensation program that (i) is widely availableto employees of the institution and (ii) does not give preference to anydirector, executive officer or principal stockholder, or certain affiliatedinterests of either, over other employees of the savings institution.  Section 22(h) also requires priorboard approval for certain loans.  Inaddition, the aggregate amount of extensions of credit by a savings institutionto all insiders cannot exceed the institution’s unimpaired capital andsurplus.  Furthermore, Section 22(g) placesadditional restrictions on loans to executive officers.  At December 31, 2007, Alliance Bank wasin compliance with the above restrictions.

 

 

 

28

----

 

**Restrictions on Acquisitions.**  Exceptunder limited circumstances, savings and loan holding companies are prohibitedfrom acquiring, without prior approval of the Director of the Office of ThriftSupervision, (i) control of any other savings institution or savings andloan holding company or substantially all the assets thereof or (ii) morethan 5% of the voting shares of a savings institution or holding companythereof which is not a subsidiary. Except with the prior approval of the Director, no director or officerof a savings and loan holding company or person owning or controlling by proxyor otherwise more than 25% of such company’s stock, may acquire control of anysavings institution, other than a subsidiary savings institution, or of anyother savings and loan holding company.

 

The Director of theOffice of Thrift Supervision may only approve acquisitions resulting in theformation of a multiple savings and loan holding company which controls savingsinstitutions in more than one state if (i) the multiple savings and loanholding company involved controls a savings institution which operated a homeor branch office located in the state of the institution to be acquired as of March 5,1987; (ii) the acquiror is authorized to acquire control of the savingsinstitution pursuant to the emergency acquisition provisions of the FederalDeposit Insurance Act ; or (iii) the statutes of the state in which theinstitution to be acquired is located specifically permit institutions to beacquired by the state-chartered institutions or savings and loan holdingcompanies located in the state where the acquiring entity is located (or by aholding company that controls such state-chartered savings institutions).

 

**Waivers of Dividends by AllianceMutual Holding Company**.  It is the policy of a numberof mutual holding companies to waive the receipt of dividends declared by theirsubsidiary companies.  Office of ThriftSupervision regulations will require Alliance Mutual Holding Company to notifythe Office of Thrift Supervision of any proposed waiver of its receipt ofdividends from Alliance Bancorp.  TheOffice of Thrift Supervision reviews dividend waiver notices on a case-by-casebasis, and, in general, does not object to any such waiver if the waiver ofcash dividends would not be detrimental to the safe and sound operation of thesubsidiary institution.  The Company has,and anticipates in the future, that Alliance Mutual Holding Company will waivedividends paid by them.  Under Office ofThrift Supervision regulations, public stockholders are not diluted because anydividends waived by a mutual holding company are not considered in determiningan appropriate exchange ratio in the event the mutual holding company convertsto stock form.

 

A condition imposed onAlliance Bank by the FDIC in connection with its formation of a mutual holdingcompany required that (1) any dividends waived by the mutual holdingcompany must be retained by the Bank and segregated, earmarked, or otherwiseidentified on the books and records, and (2) that in the event of aconversion of the mutual holding company to stock form the amount of waiveddividends must be taken into account in any valuation of the Bank and mutualholding company and factored into the calculation used in establishing a fairand reasonable basis for exchanging Bank shares for holding company shares, andthat such amounts would not be available for payment to minority shareholdersof the Bank by any means, including through dividend payments or atliquidation.  The previously imposedcondition described above remains enforceable.

 

**The Sarbanes-Oxley Act**. As a public company, Alliance Bancorp is subject to the Sarbanes-OxleyAct of 2002, which implements a broad range of corporate governance andaccounting measures for public companies designed to promote honesty andtransparency in corporate America and better protect investors from corporatewrongdoing.  The Sarbanes-Oxley Act’sprincipal legislation and the derivative regulation and rule-making promulgatedby the Securities and Exchange Commission includes:

 

·                  the creation of an independent accountingoversight board;

 

·                  auditor independence provisions thatrestrict non-audit services that accountants may provide to their auditclients;

 

·                  additional corporate governance andresponsibility measures, including the requirement that the chief executiveofficer and chief financial officer certify financial statements;

 

·                  a requirement that companies establishand maintain a system of internal control over financial reporting and that acompany’s management provide an annual report regarding its assessment of theeffectiveness of such internal control over financial reporting;

 

·                  the forfeiture of bonuses or otherincentive-based compensation and profits from the sale of an issuer’ssecurities by directors and senior officers in the twelve month periodfollowing initial publication of any financial statements that later requirerestatement;

 

·                  an increase in the oversight of, andenhancement of certain requirements relating to audit committees of publiccompanies and how they interact with the company’s independent auditors;

 

 

 

29

----

 

·                  the requirement that audit committeemembers must be independent and are absolutely barred from acceptingconsulting, advisory or other compensatory fees from the issuer;

 

·                  the requirement that companies disclosewhether at least one member of the committee is a “financial expert” (as suchterm is defined by the Securities and Exchange Commission) and if not, why not;

 

·                  expanded disclosure requirements forcorporate insiders, including accelerated reporting of stock transactions byinsiders and a prohibition on insider trading during pension blackout periods;

 

·                  a prohibition on personal loans todirectors and officers, except certain loans made by insured financialinstitutions;

 

·                  disclosure of a code of ethics and therequirement of filing of a Form 8-K for a change or waiver of such code;

 

·                  mandatory disclosure by analysts of potential conflicts of interest;and

 

·                  a range of enhanced penalties for fraud and other violations.

 

Although Alliance Bancorpanticipates that it will incur additional expense in complying with theprovisions of the Sarbanes-Oxley Act and the resulting regulations, managementdoes not expect that such compliance will have a material impact on its resultsof operations or financial condition.

 

**                                                                       FEDERALAND STATE TAXATION**

 

**General.** Alliance Bancorp, Alliance Mutual Holding Company and Alliance Bank aresubject to federal income tax provisions of the Internal Revenue Code of 1986,as amended, in the same general manner as other corporations with someexceptions listed below.  For federalincome tax purposes, Alliance Bancorp intends to file a consolidated federalincome tax return with its wholly owned subsidiaries on a fiscal yearbasis.  The applicable federal income taxexpense or benefit will be properly allocated to each subsidiary based upontaxable income or loss calculated on a separate company basis.  Upon completion of the reorganization,Alliance Mutual Holding Company is not permitted to file a consolidated federalincome tax return with Alliance Bancorp and/or Alliance Bank.

 

**Method of Accounting.** For federal income tax purposes, income and expenses are reported on theaccrual method of accounting and Alliance Bancorp will file its federal incometax return using a December 31 fiscal year end.

 

**Bad DebtReserves.**  The SmallBusiness Job Protection Act of 1996 eliminated the use of the reserve method ofaccounting for bad debt reserves by savings institutions, effective for taxableyears beginning after 1995.  Prior tothat time, Alliance Bank was permitted to establish a reserve for bad debts andto make additions to the reserve.  Theseadditions could, within specified formula limits, be deducted in arriving attaxable income.  As a result of the SmallBusiness Job Protection Act, savings associations must use the specificchargeoff method in computing their bad debt deduction beginning with their1996 federal tax return.

 

**Taxable Distributions and Recapture.**  Prior to the Small Business Job ProtectionAct, bad debt reserves created prior to January 1, 1988 were subject torecapture into taxable income if Alliance Bank failed to meet certain thriftasset and definitional tests.  Newfederal legislation eliminated these thrift related recapture rules.  However, under current law, pre-1988 reservesremain subject to recapture should Alliance Bank make certain non-dividenddistributions or cease to maintain a savings bank charter.

 

At December 31,2007, Alliance Bank’s total federal pre-1988 reserve was approximately $7.1million.  The reserve reflects thecumulative effects of federal tax deductions for which no federal income taxprovisions have been made.

 

**Minimum Tax.** The Internal Revenue Code imposes an alternative minimum tax (“AMT”) ata rate of 20% on a base of regular taxable income plus certain tax preferences(“alternative minimum taxable income” or “AMTI”).  The AMT is payable to the extent such AMTI isin excess of an exemption amount.  Netoperating losses can offset no more than 90% of AMTI.  Certain payments of alternative minimum taxmay be used as credits against regular tax liabilities in future years.  Alliance Bank has been subject to the AMT andas of December 31, 2007, had $1.1 million of AMT available as credit forcarryover purposes.

 

**Net Operating Loss Carryovers.** Net operating losses incurred in taxable years beginning before August 6,1997 may be carried back to the three preceding taxable years and forward tothe succeeding 15 taxable years.  For netoperating losses in years beginning after August 5, 1997, other than 2001and 2002, such net operating losses can be carried back to the two precedingtaxable years and forward to the succeeding 20 taxable years.  Net operating losses arising in 2001 or 2002may be carried back five years and may be carried forward 20 years.  At December 31, 2007, Alliance Bank hadno net operating loss carryforwards respectively, for federal income taxpurposes.

 

 

30

----

 

**Corporate Dividends-Received Deduction.**  Alliance Bancorp may exclude from income 100%of dividends received from a member of the same affiliated group ofcorporations.  The corporate dividendsreceived deduction is 80% in the case of dividends received from corporations,which a corporate recipient owns less than 80%, but at least 20% of thedistribution corporation.  Corporationswhich own less than 20% of the stock of a corporation distributing a dividendmay deduct only 70% of dividends received.

 

**OtherMatters. **Alliance Bank has not beenaudited by the IRS during the last five years.

 

**Pennsylvania Taxation.** Alliance Bancorp is subject to the Pennsylvania Corporate Net Income Taxand Capital Stock and Franchise Tax.  TheCorporation Net Income Tax rate for fiscal 2007 is 9.99% and is imposed onunconsolidated taxable income for federal purposes with certainadjustments.  In general, the CapitalStock Tax is a property tax imposed at the rate of approximately 0.389% (for2007) of a corporation’s capital stock value, which is determined in accordancewith a fixed formula based upon average net income and net worth.

 

AllianceBank is subject to tax under the Pennsylvania Mutual Thrift Institutions TaxAct (the “MTIT”), as amended to include thrift institutions having capitalstock.  Pursuant to the MTIT, the taxrate is 11.5%.  The MTIT exempts AllianceBank from other taxes imposed by the Commonwealth of Pennsylvania for stateincome tax purposes and from all local taxation imposed by political subdivisions,except taxes on real estate and real estate transfers.  The MTIT is a tax upon net earnings,determined in accordance with U.S. generally accepted accounting principleswith certain adjustments.  The MTIT, incomputing income under U.S. generally accepted accounting principles, allowsfor the deduction of interest earned on state and federal obligations, whiledisallowing a percentage of a thrift’s interest expense deduction in theproportion of interest income on those securities to the overall interestincome of Alliance Bank.  Net operatinglosses, if any, thereafter can be carried forward three years for MTITpurposes.  At December 31, 2007, the Bank hadapproximately $820,000, $579,000 and $800,000 in NOL carryforwards expiring in2008, 2009 and 2010, respectively, for state tax purposes.

 

**Item1A.  Risk Factors**

 

Not applicable

 

**Item1B.  Unresolved Staff Comments**

 

None

 

 

31

----

 

 

**Item2.  Properties****.**

 

**Officesand Properties**

 

At December 31,2007, the Company conducted its business from its executive offices inBroomall, Pennsylvania and eight service offices, all of which are located insoutheastern Pennsylvania.

 

The following tablesets forth certain information with respect to the office and other propertiesof the Company at December 31, 2007.

 
| **Description/Address**          | ** ** | **Leased/Owned** | ** ** | **Net Book  Value of  Premises and  Fixed Assets** | ** ** | **Amount of  Deposits** | ** ** |
|----------------------------------|------------|------------------|------------|----------------------------------------------------|------------|-------------------------|------------|
|                             |       |             |       | **(In  Thousands)**                                |       |
| MAIN OFFICE                      |       |             |       |                                               |       |                    |       |
|                             |       |             |       |                                               |       |                    |       |   |   |
| Lawrence Park                    |       | Owned            |       | $                                                  | 1,534      |                    | $          | 74,584 |   |
| 541 Lawrence Road                |       |             |       |                                               |       |                    |       |
| Broomall, PA 19008               |       |             |       |                                               |       |                    |       |
|                             |       |             |       |                                               |       |                    |       |
| BRANCH OFFICES                   |       |             |       |                                               |       |                    |       |
|                             |       |             |       |                                               |       |                    |       |
| Upper Darby                      |       | Leased (1)       |       | 20                                                 |       | 43,527                  |       |
| 69th and Walnut Sts              |       |             |       |                                               |       |                    |       |
| Upper Darby, PA 19082            |       |             |       |                                               |       |                    |       |
|                             |       |             |       |                                               |       |                    |       |
| Secane                           |       | Leased (2)       |       | 229                                                |       | 57,532                  |       |
| 925 Providence Road              |       |             |       |                                               |       |                    |       |
| Secane, PA 19018                 |       |             |       |                                               |       |                    |       |
|                             |       |             |       |                                               |       |                    |       |
| Newtown Square                   |       | Leased (3)       |       | 12                                                 |       | 23,487                  |       |
| 252 & West Chester Pike |       |             |       |                                               |       |                    |       |
| Newtown Square, PA 19073         |       |             |       |                                               |       |                    |       |
|                             |       |             |       |                                               |       |                    |       |
| Havertown                        |       | Leased (4)       |       | 79                                                 |       | 45,660                  |       |
| 500 E. Township Line Road        |       |             |       |                                               |       |                    |       |
| Havertown, PA 19083              |       |             |       |                                               |       |                    |       |
|                             |       |             |       |                                               |       |                    |       |
| Lansdowne                        |       | Owned            |       | 32                                                 |       | 24,131                  |       |
| 9 E. Baltimore Pike              |       |             |       |                                               |       |                    |       |
| Lansdowne, PA 19050              |       |             |       |                                               |       |                    |       |
|                             |       |             |       |                                               |       |                    |       |
| Springfield                      |       | Leased (5)       |       | 547                                                |       | 35,124                  |       |
| 153 Saxer Avenue                 |       |             |       |                                               |       |                    |       |
| Springfield, PA 19064            |       |             |       |                                               |       |                    |       |
|                             |       |             |       |                                               |       |                    |       |
| Shoppes at Brinton Lake          |       | Leased (6)       |       | 220                                                |       | 18,310                  |       |
| 979 Baltimore Pike               |       |             |       |                                               |       |                    |       |
| Glen Mills, PA 19342             |       |             |       |                                               |       |                    |       |
|                             |       |             |       |                                               |       |                    |       |
| Paoli Shopping Center            |       | Leased (7)       |       | 75                                                 |       | 8,343                   |       |
| 82 E. Lancaster Ave.             |       |             |       |                                               |       |                    |       |
| Paoli, PA 19301                  |       |             |       |                                               |       |                    |       |

----

(1)         The lease expires in February 2010.

 

(2)          The lease expires in April 2011with one remaining option to extend the lease for ten years.

 

(3)          The building is owned but the ground is leased.  The lease expires in June 2011 with oneremaining 

options to extend the lease for five years each.  The Company intends to exercise this option.

 

 

32

----

 

(4)         The lease expires in January 2009 with threesuccessive options to extend the lease for five years each.

 

(5)        The lease expires in September 2015.

 

(6)       The lease expires in April 2012 with twosuccessive options to extend the lease for five years each.

 

(7)      The lease expires May 2012.

 

**Item3.  Legal Proceedings.**

 

The Company is notinvolved in any pending legal proceedings other than nonmaterial legalproceedings occurring in the ordinary course of business.

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders**.

 

Not applicable.

 

**ITEM 5. MARKET FOR COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS AND PURCHASESOF EQUITY SECURITIES.**

 

This information is presented on the last page of thisForm 10-K

 

 

33

----

 

**PART II.**

 

**Item6.  Selected Financial Data.**

 

##### ***SELECTEDCONSOLIDATED FINANCIAL AND OTHER DATA***

##### *** ***

The selected consolidatedfinancial and other data of Alliance Bank set forth below does not purport tobe complete and should be read in conjunction with, and is qualified in itsentirety by, the more detailed information, including the ConsolidatedFinancial Statements and related Notes, appearing elsewhere in this AnnualReport.

 
| *** ***                                           | *** *** | **As of or For the Year Ended December 31,** |
|--------------------------------------------------------|--------------|---------------------------------------------------|
| **(Dollars in thousands, except  per share amounts)**  | ** **   | **2007**                                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Selected Financial Data**                            |         |                                              |   |   |   |   |   |   |   |   |   |
| Total assets                                           | ** **   | **$**                                             | **424,467** |   | $ | 410,350 |   | $ | 389,035 |   | $ | 382,134 |   | $ | 374,374 |   |
| Cash and cash equivalents                              | ** **   | **42,079**                                        |   | 48,283 |   | 20,956 |   | 22,137 |   | 15,388 |   |
| Loans receivable, net                                  | ** **   | **256,932**                                       |   | 235,761 |   | 224,294 |   | 209,712 |   | 208,678 |   |
| Loans held for sale                                    | ** **   | **—**                                        |   | 125 |   | **—** |   | 565 |   | 640 |   |
| Mortgage-backed securities                             | ** **   | **35,632**                                        |   | 43,636 |   | 48,362 |   | 31,497 |   | 25,018 |   |
| Investment securities                                  | ** **   | **67,861**                                        |   | 59,305 |   | 72,079 |   | 93,897 |   | 101,636 |   |
| Other real estate owned                                |         | **—**                                        |   | **—** |   | 1,795 |   | 3,475 |   | 2,604 |   |
| Deposits                                               | ** **   | **330,788**                                       |   | 333,802 |   | 297,710 |   | 286,906 |   | 274,619 |   |
| Other borrowed money (1)                               | ** **   | **37,000**                                        |   | 37,172 |   | 52,501 |   | 56,317 |   | 61,880 |   |
| Stockholders’ equity                              | ** **   | **51,458**                                        |   | 33,500 |   | 34,127 |   | 35,046 |   | 35,138 |   |
| Non-performing assets (2)                              | ** **   | **2,097**                                         |   | 1,559 |   | 3,735 |   | 5,441 |   | 8,498 |   |
|                                                   |         |                                              |   |   |   |   |   |   |   |   |   |
| **Selected Operating Data**                            |         |                                              |   |   |   |   |   |   |   |   |   |
|                                                   |         |                                              |   |   |   |   |   |   |   |   |   |
| Interest and dividend income                           | ** **   | **$**                                             | **24,340** |   | $ | 21,752 |   | $ | 19,883 |   | $ | 19,419 |   | $ | 19,822 |   |
| Interest expense                                       | ** **   | **13,999**                                        |   | 11,331 |   | 8,907 |   | 7,820 |   | 8,475 |   |
| Net interest income                                    | ** **   | **10,341**                                        |   | 10,421 |   | 10,976 |   | 11,599 |   | 11,347 |   |
| Provision for loan losses                              | ** **   | **120**                                           |   | 60 |   | 120 |   | 210 |   | 480 |   |
| Net interest  income after provision   for loan losses |         | **10,221**                                        |   | 10,361 |   | 10,856 |   | 11,389 |   | 10,867 |   |
| Other income                                           | ** **   | **484**                                           |   | 1,452 |   | 1,133 |   | 1,444 |   | 1,465 |   |
| Other expenses                                         | ** **   | **9,807**                                         |   | 10,509 |   | 10,972 |   | 10,385 |   | 10,096 |   |
| Income before income taxes                             | ** **   | **898**                                           |   | 1,304 |   | 1,017 |   | 2,448 |   | 2,236 |   |
| Income tax (benefit)expense                            | ** **   | **(157**                                          | **)** | (67 | ) | (157 | ) | 329 |   | 74 |   |
|                                                   |         |                                              |   |   |   |   |   |   |   |   |   |
| Net income                                             | ** **   | **$**                                             | **1,055** |   | $ | 1,371 |   | $ | 1,174 |   | $ | 2,119 |   | $ | 2,162 |   |
|                                                   |         |                                              |   |   |   |   |   |   |   |   |   |
| Basic and diluted earnings per share (4)               | ** **   | **$**                                             | **0.15** |   | $ | 0.19 |   | $ | 0.16 |   | $ | 0.23 |   | $ | 0.30 |   |

 

                                                                                                                                                             (Footnoteson Following Page)

 

 

34

----

 
| *** ***                                                                                         | *** *** | **As of or For the Year Ended December 31,** |
|------------------------------------------------------------------------------------------------------|--------------|---------------------------------------------------|
| ** **                                                                                           | ** **   | **2007**                                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                 |         |                                              |   |   |   |   |   |   |   |   |   |
| **Selected Operating Ratios**                                                                        |         |                                              |   |   |   |   |   |   |   |   |   |
| Average yield  earned on interest-earning   assets                                                   |         | **6.12**                                          | **%** | 5.89 | % | 5.43 | % | 5.41 | % | 5.53 | % |
| Average rate  paid on interest-bearing   liabilities                                                 |         | **4.03**                                          |   | 3.39 |   | 2.69 |   | 2.41 |   | 2.63 |   |
| Average interest rate spread (3)                                                                     | ** **   | **2.09**                                          |   | 2.49 |   | 2.74 |   | 3.00 |   | 2.90 |   |
| Net interest margin (3)                                                                              | ** **   | **2.60**                                          |   | 2.82 |   | 3.00 |   | 3.23 |   | 3.17 |   |
| Ratio of  interest-earning assets to   interest-bearing liabilities                                  |         | **114.54**                                        |   | 110.66 |   | 110.74 |   | 110.52 |   | 111.00 |   |
| Noninterest  expense as a percent of   average assets                                                |         | **2.33**                                          |   | 2.69 |   | 2.89 |   | 2.73 |   | 2.69 |   |
| Return on average assets                                                                             | ** **   | **0.25**                                          |   | 0.35 |   | 0.30 |   | 0.56 |   | 0.58 |   |
| Return on average equity                                                                             | ** **   | **2.18**                                          |   | 4.05 |   | 3.39 |   | 5.99 |   | 6.19 |   |
| Dividend payout ratio                                                                                | ** **   | **58.56**                                         |   | 90.39 |   | 105.54 |   | 58.47 |   | 57.31 |   |
| Efficiency ratio                                                                                     | ** **   | **90.60**                                         |   | 84.01 |   | 84.24 |   | 75.57 |   | 74.74 |   |
| Ratio of average equity to average assets                                                            | ** **   | **11.52**                                         |   | 8.68 |   | 8.94 |   | 9.31 |   | 9.31 |   |
| Full-service offices at end of period                                                                | ** **   | **9**                                             |   | 9 |   | 8 |   | 8 |   | 8 |   |
|                                                                                                 |         |                                              |   |   |   |   |   |   |   |   |   |
| **Asset Quality Ratios**                                                                             |         |                                              |   |   |   |   |   |   |   |   |   |
| Nonperforming  loans and troubled debt   restructurings as a percent of total   loans receivable (2) |         | **0.81**                                          |   | 0.65 |   | 0.85 |   | 0.92 |   | 2.77 |   |
| Nonperforming  assets as a percent of total   assets (2)                                             |         | **0.49**                                          |   | 0.38 |   | 0.96 |   | 1.42 |   | 2.27 |   |
| Allowance for  loan losses as a percent of   total loans receivable                                  |         | **1.09**                                          |   | 1.14 |   | 1.18 |   | 1.22 |   | 1.29 |   |
| Allowance for  loan losses as a percent of   nonperforming loans and troubled debt   restructurings  |         | **135.00**                                        |   | 174.39 |   | 137.63 |   | 132.65 |   | 46.51 |   |
| Net charge-offs  to average loans   receivable outstanding during the period                         |         | **0.00**                                          |   | 0.02 |   | 0.03 |   | 0.16 |   | 0.55 |   |
|                                                                                                 |         |                                              |   |   |   |   |   |   |   |   |   |
| **Bank Capital Ratios**                                                                              |         |                                              |   |   |   |   |   |   |   |   |   |
| Tier 1 risk-based capital ratio                                                                      | ** **   | **16.35**                                         |   | 14.05 |   | 14.92 |   | 15.38 |   | 15.52 |   |
| Total risk-based capital ratio                                                                       | ** **   | **17.38**                                         |   | 15.12 |   | 16.06 |   | 16.52 |   | 16.74 |   |
| Tier 1 leverage capital ratio                                                                        | ** **   | **10.52**                                         |   | 8.98 |   | 9.02 |   | 9.21 |   | 9.28 |   |

----

(1)          Other borrowed money consists of Federal Home LoanBank (“FHLB”) advances, demand notes issued to the U.S. Treasury and, the EmployeeStock Ownership Plan (“ESOP”) debt.

 

(2)          Nonperforming assets consist of nonperforming loans,troubled debt restructurings and other real estate owned (“OREO”). Nonperformingloans consist of nonaccrual loans and accruing loans 90 days or more overdue,while OREO consists of real estate acquired through, or in lieu of,foreclosure.

 

(3)          Interest rate spread represents the difference betweenthe weighted average yield on interest-earning assets and

the weighted average cost of interest-bearing liabilities,and net interest margin represents net interest income as a percentage ofaverage interest-earning assets.

 

(4)          The calculation of earnings per share for 2003 through2006 has been adjusted for the exchange and additional share issuance in thereorganization and offering completed on January 30, 2007.

 

 

35

----

 

**Item7.  Management’s Discussion and Analysisof Financial Condition and Results of Operation.**

 

**Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

**Overview**

 

AllianceBancorp, Inc. of Pennsylvania is a bank holding company which own 100% ofAlliance Bank (“Bank”)which is a community oriented savings bank headquartered in Broomall,Pennsylvania.  We operate a total of ninebanking offices located in Delaware and Chester Counties, which are suburbs ofPhiladelphia.  Our primary businessconsists of attracting deposits from the general public and using those funds,together with funds we borrow, to originate loans to our customers and investin securities such as U.S. Government and agency securities, mortgage–backedsecurities and municipal obligations.  AtDecember 31, 2007, we had $424.5 million of total assets, $330.8 millionof total deposits and stockholders’ equity of $51.5 million.

 

On January 30, 2007,the Bank completed its reorganization to a mid–tier holding company structureand the sale by the mid–tier company, Alliance Bancorp, Inc. ofPennsylvania (“Alliance Bancorp” or the “Company”) of shares of its commonstock.  In the reorganization andoffering, the Company sold 1,807,339 shares of common stock at a purchase priceof $10.00 per share and issued 5,417,661 shares of common stock in exchange forformer outstanding shares of Alliance Bank (the “Bank”).  Each share of the Bank’s common stock wasconverted into 2.09945 shares of the Company’s. The offering resulted in approximately $16.5 million in netproceeds.  Since Alliance Bancorp had nooperations as of December 31, 2006, the discussion in this report coversthe Bank, not the Company.

 

The Bank is primarily engaged in attracting deposits from the general publicthrough its branch offices and using such deposits primarily to (i) originateand purchase loans secured by first liens on single–family (one–to–four units)residential and commercial real estate properties and (ii) invest insecurities issued by the United States (“U.S.”) Government and agenciesthereof, municipal and corporate debt securities and certain mutual funds.  The Bank derives its income principally frominterest earned on loans, mortgage–backed securities and investments and, to alesser extent, from fees received in connection with the origination of loansand for other services.  The Bank’sprimary expenses are interest expense on deposits and borrowings and generaloperating expenses.  Funds for activitiesare provided primarily by deposits, repayments and prepayments of outstandingloans and mortgage–backed securities and other sources.

 

The Bank is subject to regulation by the Pennsylvania Department ofBanking (the “Department”), as its chartering authority and primary regulator,and by the Federal Deposit Insurance Corporation (the “FDIC”), which insuresthe Bank’s deposits up to applicable limits.

 

Certain highlights of ouroperating strategy are:

 

*Expanding our Market Presence*. We have taken steps to increase our market penetration in our existingmarket areas by increasing the products and services we offer, incentivizingour employees to cross–sell our products and emphasizing customer service in aneffort to capture more of each customer’s banking relationships.  In addition to organic growth, we continue toevaluate market expansion opportunities. In 2005, we opened a new branch office in Chester County.  Though net proceeds from the offering hasfacilitated our ability to consider additional new offices, either on a de novobasis or through acquisitions, we currently we have no plans, agreements or understandings with respect toany acquisitions.

 

*Emphasizing Business BankingOperations. *We recently hired an additional loanofficer and have increased our calls on local builders and other localbusinesses in an effort to increase our business banking relationships.  As a locally based bank, we believe that weoffer a high level of customer service and a quick loan application andapproval process which is attractive to many local, small to medium sizedbusinesses.

 

*Emphasizing Commercial RealEstate and Construction Loans. *At December 31, 2007, $122.7 millionor 47.2% of our total loan portfolio consisted of commercial real estateloans.  In addition, at such date, we had$14.6 million of construction loans. Commercial real estate and construction loans are attractive becausethey provide us with higher average yields than single–family residentialmortgage loans and they typically have adjustable rates of interest and/orshorter terms to maturity than traditional single–family residential mortgageloans.  The net proceeds from theoffering increased our capital and will facilitate our ability to make largercommercial and construction loans, subject to our current underwriting guidelines.  We intend to continue to emphasize growth inour commercial real estate and construction lending in a manner consistent withour loan underwriting policies and procedures.

 

*Considering New Product Lines.* Wecontinue to evaluate new product lines in our efforts to offer a broader arrayof products and services to our customers. In particular, we continue to evaluate financial products which willincrease our non–interest income.

 

36

----

 

*Maintaining High AssetQuality. *At December 31, 2007, our ratio of total non–performingassets to total assets was 0.49%, compared to 0.38% at December 31,2006.  We will continue to strive tomaintain high asset quality.

 

*Continuing Residential MortgageLending. *Historically, we were a traditional single–familyresidential mortgage lender, and we will continue to offer traditional single–familyresidential loan products.  In recentperiods, we have emphasized home equity loans and lines of credit due to theshorter terms to maturity and adjustable interest rates which we generallyoffer on such products as well as consumer demand for home equity loans andlines of credit.  At December 31,2007, home equity loans and lines of credit amounted to $29.5 million or 11.3%of the total loan portfolio.

 

*IncreasingCore Deposits. *We intend to increase our core depositsin order to reduce our cost of funds. The Bank offers a wide variety of deposits to its customers and iscompetitive in the rates it offers although it does not necessarily seek tomatch the highest rates paid by competitors. The Bank also promotes longer term deposits where possible andconsistent with its asset liability management goals.  In addition to increasing its core deposits,the Bank continually reviews its borrowings as a source of funds and maydetermine to prepay additional borrowings, even if there would be a prepaymentpenalty, where in the judgment of management any penalty would be offset in areasonable period through an improved net interest spread.  Management has determined not to repay orrefinance such advances at this time because the current prepayment penaltiesupon early retirement would not be offset in a reasonable period of timethrough an improved net interest spread.

 

Our results of operationsdepend, to a large extent, on net interest income, which is the differencebetween the income earned on our loan and securities portfolios and interestexpense on deposits and borrowings.  Ournet interest income is largely determined by our net interest spread, which isthe difference between the average yield earned on interest–earning assets andthe average rate paid on interest–bearing liabilities, and the relative amountsof interest–earning assets and interest–bearing liabilities. Results ofoperations are also affected by our provisions for loan losses, fees andservice charges and other non–interest income and non–interest expense.  Non–interest expense principally consists ofcompensation and employee benefits, office occupancy and equipment expense,data processing, advertising and other expense. Our results of operations are also significantly affected by generaleconomic and competitive conditions, particularly changes in interest rates, governmentpolicies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies maymaterially impact our financial condition and results of operations.

 

Our net income amountedto $1.1 million and $1.4 million for the years ended December 31, 2007 and2006, respectively.  Some of the majorfactors and trends which have impacted our results in these periods include thefollowing:

 

*Other Than Temporary Impairment of Securities.* On January 25, 2008, the Company reported net income of $1.6million or $.23 per diluted share for the year ended December 31,2007.  However, due to the continueddecline in the fair value of the Company’s investment in its $20 million mutualfunds portfolio subsequent to year end 2007, the Company has identified theimpairment of these securities as other than temporary and has reclassified theDecember 31, 2007 unrealized pre–tax loss of $860,000 as a charge againstoperating results.  This reclassificationhas no impact on previously reported stockholders’ equity as of December 31,2007.  However, as a result of thischarge, the Company is reporting a net income of $1.1 million or $.15 perdiluted share for the year ended December 31, 2007.

 

The Company attributes the lower valuations of these mutual funds to asignificant widening of spreads primarily due to the mortgage–relatedsecurities underlying these funds.  Thisspread differential is primarily due to the general lack of investor interestfor these type of securities in the current market environment.  While the funds are presently returning a4.75% dividend, their fair value has continued to decline by approximately$240,000 at the end of February 2008 as compared to December 31,2007.  If this further decline in fairvalue does not significantly recover before the Company’s next reportingperiod, an additional impairment charge will be recorded against operatingresults for the quarter ending March 31, 2008.

 

*Compression of Our Net InterestSpread and Net Interest Margin.*  Our averageinterest rate spread was 2.09% and 2.49% for the years ended December 31,2007 and 2006, respectively.  AllianceBank’s net interest margin, which is net interest income as a percentage ofaverage interest–earning assets, was 2.60% and 2.82% for the years ended December 31,2007 and 2006, respectively.  During2007, the Federal Reserve Board reduced the federal funds rate three times from5.25% at December 31, 2006 to 4.25% at December 31, 2007.  In addition, in January of 2008, theFederal Reserve Board further decreased the Federal Funds rate twice to3.00%.  The Company anticipates that thisdecrease will cause downward pressure on short term market interest rates.  Generally, a decreasing interest rateenvironment will reduce interest income earned on interest–earning assets andcause downward pressure on rates paid for interest bearing deposits.  However, interest rate changes generallyaffect interest income on prime based loans and overnight deposits almostimmediately, while the impact on interest expense on customer deposits is more gradualdue to fixed term certificates of deposit and the highly competitiveenvironment in which the Company operates. The Company 

 

 

37

----

 

anticipates that thecurrent falling rate environment will continue to put downward pressure onshort term interest rates.   Thisdecreasing interest rate environment has resulted in pricing pressure on theBank’s deposit accounts as it attracts new customers and retains existingcustomers.

 

*Managing Non–Interest Expenses.* Our non–interest expenses amounted to$9.8 million and $10.5 million for the years ended December 31, 2007 and2006, respectively.  The decrease wasprimarily due to a $507,000 or 8.4% decrease in salary and employee benefitsand a $335,000 or 51.1% decrease in advertising and marketing expenses. Thedecrease in salaries and employee benefits was attributable to a larger numberof officers in 2006 compared to 2007 primarily due to scheduledretirements.   The decrease inadvertising and marketing was attributed to the Company’s reduced focus onmedia and newspaper advertising.

 

**CriticalAccounting Policies**

 

In reviewing and understanding financial information forthe Company, you are encouraged to read and understand the significantaccounting policies used in preparing our consolidated financial statementsincluded elsewhere herein.  Thesepolicies are described in Note 2 of the notes to our consolidated financialstatements.  The accounting and financialreporting policies of the Bank conform to accounting principles generallyaccepted in the United States of America and to general practices within thebanking industry.  Accordingly, theconsolidated financial statements require certain estimates, judgments, andassumptions, which are believed to be reasonable, based upon the informationavailable.  These estimates andassumptions affect the reported amounts of assets and liabilities at the dateof the financial statements and the reported amounts of income and expensesduring the periods presented.  The followingaccounting policies comprise those that management believes are the mostcritical to aid in fully understanding and evaluating our reported financialresults.  These policies require numerousestimates or economic assumptions that may prove inaccurate or may be subjectto variations which may significantly affect our reported results and financialcondition for the period or in future periods.

 

*Allowance for Loan Losses.*The allowance for loan losses isestablished through a provision for loan losses charged to expense.  Charges against the allowance for loan lossesare made when management believes that the collectibility of loan principal isunlikely.  Subsequent recoveries areadded to the allowance.  The allowance isan amount that management believes will cover known and inherent losses in theloan portfolio, based on evaluations of the collectibility of loans.  The evaluations take into consideration suchfactors as changes in the types and amount of loans in the loan portfolio,historical loss experience, adverse situations that may affect the borrower’sability to repay, estimated value of any underlying collateral, estimatedlosses relating to specifically identified loans, and current economicconditions.  This evaluation isinherently subjective as it requires material estimates including, amongothers, exposure at default, the amount and timing of expected future cashflows on impaired loans, value of collateral, estimated losses on ourcommercial and residential loan portfolios and general amounts for historicalloss experience.  All of these estimatesmay be susceptible to significant change.

 

While management uses the best information available to make loan lossallowance evaluations, adjustments to the allowance may be necessary based on changesin economic and other conditions or changes in accounting guidance.  Historically, our estimates of the allowancefor loan loss have not required significant adjustments from management’sinitial estimates.  In addition, thePennsylvania Department of Banking and the FDIC, as an integral part of theirexamination processes, periodically review our allowance for loan losses.  The Pennsylvania Department of Banking andthe FDIC may require the recognition of adjustments to the allowance for loanlosses based on their judgment of information available to them at the time oftheir examinations.  To the extent thatactual outcomes differ from management’s estimates, additional provisions tothe allowance for loan losses may be required that would adversely impactearnings in future periods.

 

*Income Taxes.*We make estimates and judgments to calculate some ofour tax liabilities and determine the recoverability of some of our deferredtax assets, which arise from temporary differences between the tax and financialstatement recognition of revenues and expenses. We also estimate a deferred tax asset valuation allowance if, based onthe available evidence, it is more likely than not that some portion or all ofthe recorded deferred tax assets will not be realized in future periods.  These estimates and judgments are inherentlysubjective.  Historically, our estimatesand judgments to calculate our deferred tax accounts have not requiredsignificant revision to our initial estimates.

 

In evaluating our ability to recover deferred tax assets, we considerall available positive and negative evidence, including our past operatingresults, recent cumulative losses and our forecast of future taxableincome.  In determining future taxableincome, we make assumptions for the amount of taxable income, the reversal oftemporary differences and the implementation of feasible and prudent taxplanning strategies.  These assumptionsrequire us to make judgments about our future taxable income and are consistentwith the plans and estimates we use to manage our business.  Any reduction in estimated future taxableincome may require us to record an additional valuation allowance against ourdeferred tax assets.  An increase in thevaluation allowance would result in additional income tax expense in the periodand could have a significant impact on our future earnings.

 

*Other than Temporary Impairmentof Securities. *The Bank is required to perform periodicreviews of individual securities in its 

investment portfolio todetermine whether a decline in the fair value of a security is other thantemporary.  A review of other–than–

 

 

38

----

 

temporary impairmentrequires the Bank to make certain judgments regarding the nature of thedecline, its effect on the financial statements and the probability, extent andtiming of a valuation recovery and the Bank’s intent and ability to hold thesecurity.  Management evaluatessecurities for other than temporary impairment on at least a quarterly basis,and more frequently when economic or market conditions warrant suchevaluations.  Consideration is given to (1) thelength of time and the extent to which the fair value has been less than cost, (2) thefinancial condition and near–term prospects of the issuer, and (3) theintent and ability of the Bank to retain its investment in the issuer for aperiod of time sufficient to allow for any anticipated recovery in fairvalue.  If the decline in the marketvalue of a security is determined to be other than temporary we would recognizethe decline as a realized loss on the income statement.

 

**Financial Condition**

 

The Bank’s total assetsincreased $14.1 million or 3.4% to $424.5 million at December 31, 2007,compared to $410.3 million at December 31, 2006.  This increase can be attributed to a $21.2million or 9.0% increase in loans receivable as well as an $10.5 million or30.1% increase in investment securities available for sale.  The increase in loans receivable was primarilydue to new loan production.  The increasein investment securities available for sale is the result of the Bank’sincreased investment in these securities due to excess liquidity.  These increases were offset by a $6.2 millionor 12.8% decrease in cash and cash equivalent, an $8.0 million or 18.3%decrease in mortgage–backed securities, and a $2.0 million or 8.3% decrease ininvestment securities held to maturity. The decrease in cash and cash equivalents was due to the funding of theincreased loan activity and increased investment in investment securitiesavailable for sale.  The decrease inmortgage–backed securities, and investment securities held to maturity wasprimarily due to calls and maturities within the portfolios and the Bank notreinvesting in these instruments at the same levels of the calls andmaturities.  The proceeds from thesecalls and maturities were invested in cash and cash equivalents as well as tofund loan growth.  New loan production amountedto $77.0 million for 2007 and included $30.5 million in residential andconsumer lending, $32.9 million in commercial and business lending and $9.6million in real estate construction lending. In addition, the Bank generallysells all fixed–rate residential loan originations, including servicing, withterms of 15 years or more in the secondary market. Such loans sold amounted to$4.7 million in 2007.  The Bank’s netloans receivable outstanding at December 31, 2007 grew $21.2 million or9.0% to $256.9 million as compared to $235.8 million at December 31,2006.  The Bank remains committed tocontinuing its lending emphasis on developing and growing new and existingrelationships with both retail and commercial customers.

 

Total liabilitiesdecreased $3.8 million or 1.0% to $373.0 million at December 31, 2007,compared to $376.8 million at December 31, 2006.  This decrease was primarily due to a $5.1million or 23.3% decrease in non interest–bearing deposits, a $660,000 or 11.3%decrease in accrued expenses and other liabilities, and a $172,000 or 0.5%decrease in FHLB advances.  Thesedecreases were partially offset by an increase of $2.1 million or 0.7% ininterest bearing deposits.  Stockholders’equity increased $18.0 million or 53.6% to $51.5 million as of December 31,2007 compared to $33.5 million at December 31, 2006.  This increase was primarily due to a $16.4million or 216.4% increase in additional paid in capital which was primarilydue to the stock offering completed on January 30, 2007 which resulted inapproximately $16.5 million in net proceeds.

 

The Bank’s nonperformingassets, which consist of nonaccruing loans, accruing loans 90 days or moredelinquent and other real estate owned (which includes real estate acquiredthrough, or in lieu of, foreclosure) increased to $2.1 million or 0.5% of totalassets at December 31, 2007 from $1.6 million or 0.4% of total assets at December 31,2006.  At December 31, 2007, theBank’s $2.1 million of nonperforming assets consisted of $595,000 of accruingloans 90 days or more delinquent, $1.5 million of nonaccrual loans and no OREO.  At December 31, 2007, nonperformingloans consisted of $1.7 million in single–family residential real estate loans,$416,000 in commercial real estate loans, and $32,000 in consumer and otherloans.  The Bank’s management continuesto aggressively pursue the collection and resolution of all delinquent loans.

 

At December 31,2007, the Bank’s total allowance for loan losses amounted to $2.8 million, ascompared to $2.7 million at December 31, 2006.  The increase was due to $120,000 inprovisions to maintain an appropriate allowance level in light of factors suchas the level of nonperforming loans and the current economic environment.  In addition, in 2007, the Bank’s net charge–offsamounted to $9,000.  At December 31,2007, the Bank’s allowance for loan losses amounted to 135.00% of totalnonperforming loans and 1.09% of total loans receivable, as compared to 174.39%and 1.14%, respectively, at December 31, 2006.

 

Althoughmanagement uses the best information available to make determinations withrespect to the provisions for loan losses, additional provisions for loanlosses may be required to be established in the future should economic or otherconditions change substantially.  Inaddition, the Pennsylvania Department of Banking and the FDIC, as an integralpart of their examination process, periodically review the Bank’s allowance forloan losses.  Such agencies may requirethe Bank to recognize additions to such allowance based on their judgmentsabout information available to them at the time of their examination.

 

 

39

----

 

**Results of Operations**

 

**General**.  The Bankrecorded net income of $1.1 million for the year ended December 31, 2007as compared to net income of $1.4 million in 2006.  Net interest income decreased $80,000 for theyear ended December 31, 2007, compared to 2006, primarily due to adecreasing interest rate environment during 2007. During 2007, the FederalReserve Board reduced the federal funds rate three times from 5.25% at December 31,2006 to 4.25% at December 31, 2007. In addition in January of 2008 the Federal Reserve Board furtherdecreased the Federal Funds rate twice to 3.00%.  The Company anticipates that this decreasewill cause downward pressure on short term market interest rates.  Generally, a decreasing interest rateenvironment will reduce interest income earned on interest–earning assets andcause downward pressure on rates paid for interest bearing deposits.  However, interest rate changes generallyaffect interest income on prime based loans and overnight deposits almostimmediately, while the impact on interest expense on customer deposits is moregradual due to fixed term certificates of deposit and the highly competitiveenvironment in which the Company operates. The Company anticipates that the current falling rate environment willcontinue to put downward pressure on short term interest rates.   This decreasing interest rate environmenthas resulted in pricing pressure on the Bank’s deposit accounts as it attractsnew customers and retains existing customers. Other income decreased $968,000 or 66.7% for the year ended December 31,2007, compared to 2006.  This decrease isprimarily attributable to an $860,000 impairment charge on securities discussedin detail in the next paragraph and a $101,000 decrease in the gain on the saleof OREO. In 2006 the Bank recognized a gain on sale of other real estate ownedof $122,000 compared to a $21,000 gain for the comparable period in 2007.   Other expenses decreased by $702,000 or 6.7%for the year ended December 31, 2007, compared to 2006.  This decrease is primarily due to decreasesin salaries and employee benefits and a $335.1 thousand decrease in advertisingand marketing.  The decrease inadvertising and marketing was attributed to the Company’s reduced focus onmedia and newspaper advertising, for the year ended December 31, 2007,compared to 2006.  The decrease insalaries and employee benefits was attributable to a larger number of officersin 2006 compared to 2007 primarily due to scheduled retirements.  The provision for loan losses increased$60,000 primarily due to increases in loans receivable and nonperformingloans.  For 2007 the Company recorded a$157,000 income tax benefit compared to a $67,000 tax benefit for 2006.  The income tax benefit increased due to alower amount of pretax income for the year ended December 31, 2007,compared to 2006.

 

On January 25, 2008, the Company reported net income of $1.6million or $.23 per diluted share for the year ended December 31, 2007.  However, due to the continued decline in thefair value of the Company’s investment in its $20 million mutual fundsportfolio subsequent to year end 2007, the Company has identified theimpairment of these securities as other than temporary and has reclassified theDecember 31, 2007 unrealized pre–tax loss of $860,000 as a charge againstoperating results.  This reclassificationhas no impact on previously reported stockholders’ equity as of December 31,2007.  However, as a result of thischarge, the Company is reporting a net income of $1.1 million or $.15 perdiluted share for the year ended December 31, 2007.

 

The Company attributes the lower valuations of these mutual funds to asignificant widening of spreads primarily due to the mortgage–related securitiesunderlying these funds.  This spreaddifferential is primarily due to the general lack of investor interest forthese type of securities in the current market environment.  While the funds are presently returning a4.75% dividend, their fair value has continued to decline by approximately$240,000 at the end of February 2008 as compared to December 31,2007.  If this further decline in fairvalue does not significantly recover before the Company’s next reportingperiod, an additional impairment charge will be recorded against operatingresults for the quarter ending March 31, 2008.

 

 

40

----

 

**Average Balances, Net InterestIncome and Yields Earned and Rates Paid.**  The followingaverage balance sheet table sets forth for the periods indicated, informationon the Bank regarding:  (i) thetotal dollar amounts of interest income on interest–earning assets and theresulting average yields; (ii) the total dollar amounts of interestexpense on interest–bearing liabilities and the resulting average costs; (iii) netinterest income; (iv) interest rate spread; (v) net interest–earningassets (interest–bearing liabilities); (vi) the net yield earned oninterest–earning assets; and (vii) the ratio of total interest–earningassets to total interest–bearing liabilities. Information is based on average daily balances during the periodspresented.

 
| *** ***                                                                  | *** *** | **Year  Ended December 31,**   | ** ** |
|-------------------------------------------------------------------------------|--------------|-------------------------------------|------------|
| ** **                                                                    | ** **   | **At**

**Dec. 31,**

**2007** | ** ** | ** ** |   | **2007** |   |   |   |   |   | **2006** | ** ** | ** ** | ** ** | ** ** | ** ** | **2005** |   |   |   |
|                                                                          |         | **Yield/  Rate**                    | ** ** | **Average  Balance** | ** ** | **Interest** |   | **Yield/  Rate** |   | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** |   |
| ***(Dollars in Thousands)***                                                  | ** **   | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest–earning assets:**                                             | ** **   |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable  (1) (2)                                                |         | **6.74**                            | **%**      | **$247,157** |   | **$16,966** |   | **6.86** | **%** | $232,520 |   | $15,534 |   | 6.68 | % | $218,036 |   | $14,214 |   | 6.52 | % |
| Mortgage–backed   securities                                             |         |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment  securities                                                        | ** **   | **4.73**                            | ** ** | **39,660** | ** ** | **1,816** | ** ** | **4.58** |   | 47,342 |   | 2,184 |   | 4.61 |   | 41,327 |   | 1,808 |   | 4.37 |   |
| Other  interest–earning   assets                                         |         | **4.88**                            | ** ** | **64,983** | ** ** | **3,333** | ** ** | **5.13** |   | 70,927 |   | 3,219 |   | 4.54 |   | 84,771 |   | 3,271 |   | 3.86 |   |
| Total  interest–earning   assets                                         | ** **   | **4.27**                            | ** ** | **46,200** | ** ** | **2,225** | ** ** | **4.82** | ** ** | 18,532 |   | 815 |   | 4.40 |   | 21,993 |   | 590 |   | 2.68 |   |
| Noninterest–earning  assets                                              |         | **6.02**                            | ** ** | **398,000** | ** ** | **24,340** | ** ** | **6.12** |   | 369,321 |   | 21,752 |   | 5.89 |   | 366,126 |   | 19,883 |   | 5.43 |   |
| Total assets                                                                  |         | ** **                          |       | **22,741** |   |   |   |   |   | 20,942 |   |   |   |   |   | 20,874 |   |   |   |   |   |
|                                                                          | ** **   | ** **                          |       | **$420,741** |   |   |   |   |   | $390,263 |   |   |   |   |   | $387,001 |   |   |   |   |   |
| **Interest–bearing liabilities:**                                        | ** **   |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                      | ** **   | **3.45**                            |       | **$310,112** |   | **$11,618** |   | **3.75** |   | $285,768 |   | 8,350 |   | 2.92 |   | $277,507 |   | 5,666 |   | 2.04 |   |
| FHLB advances and    other borrowings                                         |         | **6.34**                            |       | **37,356** |   | **2,381** |   | **6.37** |   | 47,990 |   | 2,981 |   | 6.21 |   | 53,116 |   | 3,241 |   | 6.10 |   |
| Total  interest–bearing   liabilities                                    | ** **   | **3.74**                            |       | **347,468** |   | **13,999** |   | **4.03** |   | 333,758 |   | 11,331 |   | 3.39 |   | 330,623 |   | 8,907 |   | 2.69 |   |
| Noninterest–bearing    liabilities                                       | ** **   |                                | ** ** | **24,800** |   |   |   |   |   | 22,617 |   |   |   |   |   | 21,796 |   |   |   |   |   |
| Total liabilities                                                             |         |                                | ** ** | **372,268** |   |   |   |   |   | 356,375 |   |   |   |   |   | 352,419 |   |   |   |   |   |
| Stockholders’  equity                                                    |         | ** **                          |       | **48,473** |   |   |   |   |   | 33,888 |   |   |   |   |   | 34,582 |   |   |   |   |   |
| Total liabilities  and stockholders’ equity                              |         |                                |       | **$420,741** |   |   |   |   |   | $390,263 |   |   |   |   |   | $387,001 |   |   |   |   |   |
|                                                                          | ** **   |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest–earning assets                                              |         | ** **                          |       | **$50,532** |   |   |   |   |   | $35,563 |   |   |   |   |   | $35,504 |   |   |   |   |   |
| Net interest  income/interest   rate spread                                   |         | **2.28**                            | **%**      |   |   | **$10,341** |   | **2.09** | **%** |   |   | $10,421 |   | 2.49 | % |   |   | $10,976 |   | 2.74 | % |
| Net yield on  interest–   earning assets (3) (4)                    | ** **   |                                |       |   |   |   |   | **2.60** | **%** |   |   |   |   | 2.82 | % |   |   |   |   | 3.00 | % |
| Ratio of  interest–earning assets   to interest–bearing liabilities |         |                                |       |   |   |   |   | **114.54** | **%** |   |   |   |   | 110.66 | % |   |   |   |   | 110.74 | % |
|                                                                               |              |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)      Includes loans held for sale.

(2)             Nonaccrual loans and loan fees have been included.

(3)             Net interest income divided by interest–earning assets.

(4)             The indicated yields are not reflected on a taxequivalent basis.

 

 

41

----

 

**Rate/Volume analysis. **The following table describes the extent to whichchanges in interest rates and changes in volume of interest–related assets andliabilities have affected the Bank’s interest income and expense during theperiods indicated.  For each category ofinterest–earning assets and interest–bearing liabilities, information isprovided on changes attributable to (i) changes in volume (change involume multiplied by prior year rate), (ii) changes in rate (change inrate multiplied by prior year volume), and (iii) total change in rate andvolume.  The combined effect of changesin both rate and volume has been allocated proportionately to the change due torate and the change due to volume.

 
| *** ***                               | *** *** | *** *** | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|--------------|--------------|------------|----------------------------------|------------|
| ** **                                 | ** **   | ** **   | ** ** | **2007 vs. 2006**                | ** ** |
| ** **                                 | ** **   | ** **   | ** ** | **Increase**                     | ** ** |
|                                       | ** **   | ** **   |       | **(Decrease)  Due To**           |       |
|                                       |         |         |       |                             |       |   |   |   |   |
|                                       | ** **   | ** **   |       |                             |       |   |   | **Total** |   |
|                                       | ** **   | ** **   |       |                             |       |   |   | **Increase** |   |
|                                       | ** **   | ** **   | ** ** | **Rate**                         | ** ** | **Volume** | ** ** | **(Decrease)** |   |
| **(Dollars in Thousands)**                 |         |         |       |                             |       |   |   |   |   |
| **Interest–earning assets:**          |         |         |       |                             |       |   |   |   |   |
|                                       |         |         |       |                             |       |   |   |   |   |
| Loans receivable                           | ** **   | ** **   | ** ** | **$**                            | **446**    | ** ** | **$** | **986** | ** ** | **$** | **1,432** |   |
| Mortgage–backed securities            | ** **   | ** **   | ** ** | **(14**                          | **)**      | **(354** | **)** | **(368** | **)** |
| Investment securities                      | ** **   | ** **   | ** ** | **482**                          | ** ** | **(368** | **)** | **114** |   |
| Other interest–earning assets         | ** **   | ** **   | ** ** | **186**                          | ** ** | **1,224** | ** ** | **1,410** |   |
| Total  interest–earning assets        |         |         | ** ** | **1,100**                        | ** ** | **1,488** | ** ** | **2,588** | ** ** |
|                                       |         |         |       |                             |       |   |   |   |   |
| **Interest–bearing liabilities:**     |         |         |       |                             |       |   |   |   |   |
|                                       |         |         |       |                             |       |   |   |   |   |
| Deposits                                   | ** **   | ** **   | ** ** | **2,404**                        | ** ** | **865** | ** ** | **3,269** |   |
| FHLB advances and other borrowings         | ** **   | ** **   | ** ** | **58**                           | ** ** | **(659** | **)** | **(601** | **)** |
| Total  interest–bearing liabilities   |         |         | ** ** | **2,462**                        | ** ** | **206** | ** ** | **2,668** | ** ** |
|                                       |         |         |       |                             |       |   |   |   |   |
| Increase (decrease) in net interest income | ** **   | ** **   | ** ** | **$**                            | **(1,362** | **)** | **$** | **1,281** | ** ** | **$** | **(80** | **)** |

 

**NetInterest Income.**  Net interest income is determined by the Bank’sinterest rate spread (i.e., the difference between the yields earned on itsinterest–earning assets and the rates paid on its interest–bearing liabilities)and the relative amounts of interest–earning assets and interest–bearingliabilities.  Net interest incomedecreased $80,000 or 0.8% to $10.3 million for the year ended December 31,2007 compared to 2006. This decrease was primarily due to an increase in theaverage balances of deposits and an increase in rates paid on such deposits,partially offset by an increase in the average balances of loans and a decreasein the average balance of FHLB advances.

 

**Interestand Dividend Income.**  Interest income increased $2.6 million or11.9% to $24.3 million for the year ended December 31, 2007, compared tothe same period in 2006.  The increasewas due to a $1.4 million or 9.2% increase in interest income on loans, a$114,000 or 3.6% increase in investment securities and a $1.4 million or 173.2%increase in interest income on balances due from depository institutions.  These increases were offset by a $368,000 or16.9% decrease in interest income earned on mortgage–backed securities.  The increase in interest income on loans wasdue to a $14.6 million increase in the average balance of the loan portfolioand an 18 basis point (one basis point is equal to 1/100 of a percent) increasein the average yield earned on loans. The increase in interest income on investment securities was due to a 59basis point increase average yield earned on such securities, partially offsetby a $5.9 million decrease in the average balance of investmentsecurities.  The increase in interest anddividend income on balances due from depository institutions was primarily dueto a $27.7 million or 149.3% increase in the average balance and a 42 basispoint increase in the average yield earned. The decrease in interest income on mortgage backed securities was due toa $7.7 million or 16.2% decrease in the average balance outstanding offset by a3 basis point decrease in yield.

 

**InterestExpense.**  Interest expense increased $2.7 million or23.5% to $14.0 million for the year ended December 31, 2007, compared tothe same period in 2006.  This increasewas due to an increase of $3.3 million or 39.1% in interest expense ondeposits, partially offset by a decrease of $601,000 or 20.2% in interestexpense on FHLB advances and other borrowings. The increase in interest expense on deposits was due to a $24.3 millionor an 8.5% increase in the average balance outstanding and an 

 

 

42

----

 

83 basis pointincrease in the average rate paid.  Thedecrease in interest expense on FHLB advances and other borrowings was due to a$10.6 million or 22.2% decrease in the average balance outstanding partiallyoffset by a 16 basis point increase in the average rates paid. The decrease inthe average balance of FHLB advances was primarily attributable to therepayment of a $10.0 million advance in July of 2006 and, to a lesserextent, the maturity and repayment of a $5.0 million advance in December of2006.  Substantially all $37.3 million inFHLB average advances at December 31, 2007 are long–term, and have fixed–ratesof interest. The weighted average rate of the Bank’s FHLB advances was 6.37% asof December 31, 2007.  The long–term,fixed–rate advances are subject to significant prepayment penalties upon earlyrepayment and, therefore, management has determined not to repay or refinancesuch advances at this time.

 

**Provisionfor Loan Losses. **The Bank establishes provisions for loanlosses, which are charges to operating results, in order to maintain a level oftotal allowance for losses that management believes, to the best of itsknowledge, covers all known and inherent losses that are both probable and reasonablyestimable, at each reporting date.  Theallowance is based upon an assessment of prior loss experience, the volume andtype of lending conducted by the Bank, industry standards, past due loans,economic conditions in the Bank’s market area and other factors related to thecollectibility of the Bank’s loan portfolio. The provision for loan losses amounted to $120,000 and $60,000 for theyears ended December 31, 2007 and 2006, respectively.

 

**Other Income.**  Total otherincome decreased $968,000 or 66.7% to $484,000 for the year ended December 31,2007, compared to the same period in 2006. This decrease is primarily attributable to an $860,000 impairment chargeon securities.  On January 25, 2008,the Company reported net income of $1.6 million or $.23 per diluted share forthe year ended December 31, 2007. However, due to the continued decline in the fair value of the Company’sinvestment in its $20 million mutual funds portfolio subsequent to year end2007, the Company has identified the impairment of these securities as otherthan temporary and has reclassified the December 31, 2007 unrealized pre–taxloss of $860,000 as a charge against operating results.  This reclassification has no impact onpreviously reported stockholders’ equity as of December 31, 2007.  However, as a result of this charge, theCompany is reporting a net income of $1.1 million or $.15 per diluted share forthe year ended December 31, 2007.

 

The Company attributes the lower valuations of these mutual funds to asignificant widening of spreads primarily due to the mortgage–relatedsecurities underlying these funds.  Thisspread differential is primarily due to the general lack of investor interestfor these type of securities in the current market environment.  While the funds are presently returning a4.75% dividend, their fair value has continued to decline by approximately$240,000 at the end of February 2008 as compared to December 31,2007.  If this further decline in fairvalue does not significantly recover before the Company’s next reportingperiod, an additional impairment charge will be recorded against operatingresults for the quarter ending March 31, 2008.

 

The decrease inother income was also affected by a $101,000 decrease in the gain on the saleof OREO.  In 2006, the Bank recognized again on sale of other real estate owned of $122,000 compared to a $21,000 gainfor the comparable period in 2007.  TheBank has collected a management fee from Alliance Mutual Holdings which reimbursesthe Bank for certain salary and overhead costs the Bank incurs on behalf ofAlliance Mutual Holdings.  The managementfees for 2007 and 2006, were $420,000 and $480,000, respectively.

 

**OtherExpenses.**  Our non–interest expenses amounted to $9.8million and $10.5 million for the years ended December 31, 2007 and 2006,respectively.  The decrease in 2007 wasprimarily due to a $507,000 or 8.4% decrease in salary and employee benefitsand a $335,000 or 51.1% decrease in advertising and marking expenses. Thedecrease in salaries and employee benefits was attributable to a larger numberof officers in 2006 compared to 2007 primarily due to scheduledretirements.   The decrease inadvertising and marketing was attributed to the Company’s reduced focus onmedia and newspaper advertising.

 

**IncomeTax Expense (Benefit).**  Income tax benefit amounted to$157,000 and $67,000 for the years ended December 31, 2007 and 2006,respectively, resulting in effective tax rates of (17.5)% and (5.1)%,respectively.  The increase in income taxbenefit for the year ended December 31, 2007 was primarily due to lowerpre–tax income in 2007 compared to 2006 as a result of the $860,000 impairmenton securities, partially offset by lower tax–exempt income from securities whencompared to 2006.  The negative effectivetax rates primarily resulted from tax exempt income from Bank–owned lifeinsurance and certain tax–exempt securities purchased by the Bank.

 

**Liquidityand Capital Resources**

 

The Bank’sliquidity, represented by cash and cash equivalents, is a product of its cash flowsfrom operations.  The Bank’s primarysources of funds are deposits, borrowings, amortization, prepayments andmaturities of outstanding loans and mortgage–backed securities, sales of loans,maturities and calls of investment securities and other short–term investmentsand income from operations.  Changes inthe cash flows of these instruments are greatly influenced by economicconditions and competition.  After thecompletion of its reorganization and stock offering in January of 2007,the Bank’s liquidity and capital position were further 

 

 

43

----

 

strengthenedresulting from $16.5 million in net proceeds from the stock offering.  The Bank attempts to balance supply anddemand by managing the pricing of its loan and deposit products whilemaintaining a level of growth consistent with the conservative operatingphilosophy of the management and board of directors.  Any excess funds are invested in overnightand other short–term interest–earning accounts. The Bank generates cash flow through the retail deposit market, itstraditional funding source, for use in investing activities.  In addition, the Bank may utilize borrowingssuch as Federal Home Loan Bank advances for liquidity or profitenhancement.  At December 31, 2007,the Bank had $37.0 million of outstanding advances and $144.5 million ofadditional borrowing capacity from the FHLB of Pittsburgh.  Further, the Bank has access to the FederalReserve Bank discount window.  At December 31,2007, the Bank had no such funds outstanding.

 

The primary use offunds is to meet ongoing loan and investment commitments, to pay maturingsavings certificates and savings withdrawals and expenses related to generaloperations of the Bank.  At December 31,2007, the total approved loan commitments outstanding amounted to $15.0million.  At the same date, commitmentsunder unused lines of credit amounted to $30.2 million.  Certificates of deposit scheduled to maturein one year or less at December 31, 2007, totaled $181.1 million.  Management believes that a significantportion of maturing deposits will remain with the Bank.  Investment and mortgage–backed securitiestotaled $103.5 million at December 31, 2007, of which $51.7 million arescheduled to mature or reprice in one year or less.  The Bank anticipates that it will continue tohave sufficient cash flows to meet its current and future commitments.

 

In 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Nos. FAS 115–1 and FAS 124–1, “The Meaning of Other–Than–Temporary Impairment and Its Application to Certain Investments.” This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other–than–temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other–than–temporary impairments. This FSP nullifies certain requirements of EITF Issue 03–1, “The Meaning of Other–Than–Temporary Impairment and Its Application to Certain Investments”, and supersedes EITF Topic No. D–44, “Recognition of Other–Than–Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” The guidance in this FSP amends SFAS Statement No. 115,”Accounting for Certain Investments in Debt and Equity Securities.”

 

Managementevaluates securities for other–than–temporary impairment at least on aquarterly basis, and more frequently when economic or market conditions warrantsuch evaluation.  Consideration is givento (1) the length of time and the extent to which the fair value has beenless than cost, (2) the financial condition and near–term prospects of theissuer, and (3) the intent and ability of the Bank to retain itsinvestment in the issuer for a period of time sufficient to allow for anyanticipated recovery in fair value.   These unrealized losses do not represent an other–than–temporaryimpairment at December 31, 2007 due to the intent and ability of the Bankto hold until maturity or an anticipated recovery in fair value.

 

On January 25, 2008, the Company reported net income of $1.6million or $.23 per diluted share for the year ended December 31,2007.  However, due to the continueddecline in the fair value of the Company’s investment in its $20 million mutualfunds portfolio subsequent to year end 2007, the Company has identified theimpairment of these securities as other than temporary and has reclassified theDecember 31, 2007 unrealized pre–tax loss of $860,000 as a charge againstoperating results.  This reclassificationhas no impact on previously reported stockholders’ equity as of December 31,2007.  However, as a result of thischarge, the Company is reporting a net income of $1.1 million or $.15 perdiluted share for the year ended December 31, 2007.

 

The Company attributes the lower valuations of these mutual funds to asignificant widening of spreads primarily due to the mortgage–relatedsecurities underlying these funds.  Thisspread differential is primarily due to the general lack of investor interestfor these type of securities in the current market environment.  While the funds are presently returning a4.75% dividend, their fair value has continued to decline by approximately$240,000 at the end of February 2008 as compared to December 31,2007.  If this further decline in fairvalue does not significantly recover before the Company’s next reportingperiod, an additional impairment charge will be recorded against operatingresults for the quarter ending March 31, 2008.

 

 

44

----

 

**BankRegulatory Capital Requirements**

 

The followingtable summarizes the Bank’s total stockholder’s equity, FDIC regulatorycapital, total FDIC risk-based assets, leverage and risk-based regulatoryratios at December 31, 2007.

 
| **(Dollars in Thousands)**                                  | ** ** | ** **    | ** ** |
|-------------------------------------------------------------|------------|---------------|------------|
|                                                        |       |          |       |
| Total stockholder’s equity or GAAP capital (Bank)      |       | $             | 43,842     |   |
| FDIC adjustment for securities available–for–sale |       | (115          | )          |
| FDIC adjustment for retirement plans                        |       | 901           |       |
| FDIC leverage capital                                       |       | 44,628        |       |
| Plus:  FDIC  tier 2 capital (1)                        |       | 2,831         |       |
| Total FDIC risk-based capital                               |       | $             | 47,459     |   |
|                                                        |       |          |       |
| FDIC quarterly average total assets for leverage  ratio     |       | $             | 424,105    |   |
| FDIC net risk-weighted assets                               |       | 273,018       |       |
|                                                        |       |          |       |
| FDIC leverage capital ratio                                 |       | 10.52         | %          |
| Minimum requirement (2)                                     |       | 4.00% to 5.00 | %          |
|                                                        |       |          |       |
| FDIC risk-based capital — tier 1                       |       | 16.35         | %          |
| Minimum requirement                                         |       | 4.00          | %          |
|                                                        |       |          |       |
| FDIC actual capital (tier 1 & 2)                   |       | 17.38         | %          |
| Minimum requirement                                         |       | 8.00          | %          |

----

| (1)    |   | Tier 2 capital consists entirely of the allowable  portion of the allowance for loan losses, which is limited to   1.25% of total risk-weighted assets as detailed under regulations of the  FDIC.                                                                                                                                                         |   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                                                                                                                                                                                                       |   |   |   |
| (2)    |   | The FDIC has indicated that most highly rated  institutions which meet certain criteria will be required to maintain a ratio  of 3%, and all other institutions will be required to maintain an additional  cushion of 100 to 200 basis points.As of December 31, 2007, the Bank had  not been advised of any additional requirements in this regard. |   |
|        |        |                                                                                                                                                                                                                                                                                                                                                            |        |  |  |

 

**RecentAccounting Pronouncements**

 

FASB statement No. 141(R) “Business Combinations” was issued in December of 2007. ThisStatement establishes principles and requirements for how the acquirer of abusiness recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, and any noncontrolling interest inthe acquiree. The Statement also provides guidance for recognizing andmeasuring the goodwill acquired in the business combination and determines whatinformation to disclose to enable users of the financial statements to evaluatethe nature and financial effects of the business combination. The guidance willbecome effective as of the beginning of a company’s fiscal year beginning afterDecember 15, 2008. This new pronouncement will impact the Company’saccounting for business combinations completed beginning January 1, 2009.

 

FASB statement No. 160“Noncontrolling Interests in Consolidated Financial Statements—an amendment ofARB No. 51” was issued in December of 2007. This Statementestablishes accounting and reporting standards for the noncontrolling interestin a subsidiary and for the deconsolidation of a subsidiary. The guidance willbecome effective as of the beginning of a company’s fiscal year beginning afterDecember 15, 2008. The Company is currently evaluating the potentialimpact the new pronouncement will have on its consolidated financialstatements.

 

Staff AccountingBulletin No. 110 (SAB 110) amends and replaces Question 6 of Section D.2of Topic 14, “Share-Based Payment,” of the Staff Accounting Bulletin series.Question 6 of Section D.2 of Topic 14 expresses the views of the staffregarding the use of the “simplified” method in developing an estimate ofexpected term of “plain vanilla” share options and allows usage of the “simplified”method for share option grants prior to December 31, 2007. SAB 110 allowspublic companies which do not have historically sufficient experience toprovide a reasonable estimate to continue use of the “simplified” method forestimating the expected term of “plain vanilla” share option grants after December 31,2007.  SAB 110 is effective January 1,2008.

 

Staff AccountingBulletin No. 109 (SAB 109), “Written Loan Commitments Recorded at FairValue Through Earnings” expresses 

 

 

45

----

 

the views of thestaff regarding written loan commitments that are accounted for at fair valuethrough earnings under generally accepted accounting principles. To make thestaff’s views consistent with current authoritative accounting guidance, theSAB revises and rescinds portions of SAB No. 105, “Application ofAccounting Principles to Loan Commitments.”  Specifically, the SABrevises the SEC staff’s views on incorporating expected net future cash flowsrelated to loan servicing activities in the fair value measurement of a writtenloan commitment. The SAB retains the staff’s views on incorporating expectednet future cash flows related to internally-developed intangible assets in thefair value measurement of a written loan commitment. The staff expectsregistrants to apply the views in Question 1 of SAB 109 on a prospective basisto derivative loan commitments issued or modified in fiscal quarters beginningafter December 15, 2007. The Company does not expect SAB 109 to have amaterial impact on its financial statements.

 

In December 2007,the FASB issued proposed FASB Staff Position (FSP) 157-b, “Effective Date ofFASB Statement No. 157,” that would permit a one-year deferral in applyingthe measurement provisions of Statement No. 157 to non-financial assetsand non-financial liabilities (non-financial items) that are not recognized ordisclosed at fair value in an entity’s financial statements on a recurringbasis (at least annually). Therefore, if the change in fair value of anon-financial item is not required to be recognized or disclosed in thefinancial statements on an annual basis or more frequently, the effective dateof application of Statement 157 to that item is deferred until fiscal yearsbeginning after November 15, 2008 and interim periods within those fiscalyears. This deferral does not apply, however, to an entity that appliesStatement 157 in interim or annual financial statements before proposed FSP157-b is finalized. The Company is currently evaluating the impact, if any,that the adoption of FSP 157-b will have on the Company’s operating income ornet earnings.

 

In June 2007,the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 06-11,“Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards”(“EITF 06-11”). EITF 06-11 states that an entity should recognize arealized tax benefit associated with dividends on nonvested equity shares,nonvested equity share units and outstanding equity share options charged toretained earnings as an increase in additional paid in capital. The amountrecognized in additional paid in capital should be included in the pool ofexcess tax benefits available to absorb potential future tax deficiencies onshare-based payment awards. EITF 06-11 should be applied prospectively toincome tax benefits of dividends on equity-classified share-based paymentawards that are declared in fiscal years beginning after December 15,2007. The implementation of this standard did not have any effect on theCompany’s financial position or results of operations.

 

In May 2007,the FASB issued FASB Staff Position (“FSP”) FIN 48-1 “Definition of Settlementin FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 providesguidance on how to determine whether a tax position is effectively settled forthe purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1is effective retroactively to January 1, 2007. The implementation of thisstandard did not have any impact the Company’s consolidated financial positionor results of operations.

 

In February 2007,the FASB issued FASB Staff Position (FSP) FAS 158-1, “ConformingAmendments to the Illustrations in FASB Statements No. 87, No. 88,and No 106 and to the Related Staff Implementation Guides.” This FSP makesconforming amendments to other FASB statements and staff implementation guidesand provides technical corrections to SFAS No. 158, “Employers’ Accountingfor Defined Benefit Pension and Other Postretirement Plans.” The conformingamendments in this FSP shall be applied upon adoption of SFAS No. 158. Theadoption of FSP FAS 158-1 did not have a material impact on the consolidatedfinancial statements or disclosures.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities— including an amendment of FASB Statements No. 115”SFAS No. 159 permits entities to choose to measure financial instrumentsand certain other items at fair value that are not currently required to bemeasured at fair value.   This Statementis effective as of the beginning of an entity’s first fiscal year beginningafter November 15, 2007.  Theadoption of this pronouncement of SFAS No. 159 did not have any effect onits consolidated financial position and results of operations.

 

In March 2007,the FASB ratified Emerging Issues Task Force Issue No. 06-10 “Accountingfor Collateral Assignment Split-Dollar Life Insurance Agreements” (EITF 06-10).EITF 06-10 provides guidance for determining a liability for the postretirementbenefit obligation as well as recognition and measurement of the associatedasset on the basis of the terms of the collateral assignment agreement. EITF06-10 is effective for fiscal years beginning after December 15, 2007. Theadoption of EITF 06-10 did not have any impact on its financial position,results of operations or cash flows.

 

On September 7,2006, the Task Force reached a conclusion on EITF Issue No. 06-5, “Accountingfor Purchases of Life Insurance — Determining the Amount That Could Be Realizedin Accordance with FASB Technical Bulletin No. 85-4, Accounting forPurchases of Life Insurance” (“EITF 06-5”). The scope of EITF 06-5 consists ofsix separate issues relating to accounting for life insurance policiespurchased by entities protecting against the loss of “key persons.” The sixissues are clarifications of previously issued guidance on FASB TechnicalBulletin No. 85-4. EITF 06-5 is effective for fiscal years beginning afterDecember 15, 2006. The adoption of this EIFT did not have any impact onthe Company’s consolidated financial statements.

 

 

46

----

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurement.” SFAS No. 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles, and expands disclosures about fairvalue measurements. This Statement does not require any new fair valuemeasurements. SFAS No. 157 is effective for fiscal years beginning after November 15,2007 and interim periods within those fiscal years. Management believes theadoption of this pronouncement of SFAS No. 157 will not have a materialeffect on its consolidated financial position and results of operations.

 

The EITF reached aconsensus on EITF Issue No. 06-4, “The Accounting for DeferredCompensation and Postretirement Benefit Aspects of Endorsement Split-DollarLife Insurance Arrangements” (“EITF 06-4”). EITF 06-4 addresses whether thepostretirement benefit associated with an endorsement split-dollar lifeinsurance arrangement is effectively settled in accordance with Statement ofFinancial Accounting Standards No. 106, “Employers’ Accounting forPostretirement Benefits Other Than Pensions” and APB Opinion No. 12 “OmnibusOpinion—1967” upon entering into such an arrangement. EITF 06-4 is effectivefor fiscal years beginning after December 15, 2007. Management believesthe adoption of EITF Issue No. 06-4 will not have a material effect on itsconsolidated financial position and results of operations.

 

**Impact ofInflation and Changing Prices**

 

The consolidatedfinancial statements and related financial data presented herein have beenprepared in accordance with accounting principles generally accepted in theUnited States of America, which require the measurement of financial positionand operating results in terms of historical dollars, without consideringchanges in relative purchasing power over time due to inflation.  Unlike most industrial companies, virtuallyall of the Bank’s assets and liabilities are monetary in nature.  As a result, interest rates generally have amore significant impact on a financial institution’s performance than does theeffect of inflation.

 

**Controlsand Procedures**

 

The Company’smanagement evaluated, with the participation of the Chief Executive Officer andChief Financial Officer, the effectiveness of the Bank’s disclosure controlsand procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934) as of the end of the period covered bythis report. Based on such evaluation, the Chief Executive Officer and theChief Financial Officer have concluded that the Company’s disclosure controlsand procedures are designed to ensure that financial information required to bedisclosed by the Company in the reports that are filed or submitted under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and regulations andare operating in an effective manner.

 

No change in theCompany’s internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934) occurred during themost recent fiscal quarter that has materially affected, or is reasonablylikely to materially affect, its internal control over financial reporting.

 

**Forward-LookingStatements**

 

This Reportcontains certain forward-looking statements and information relating to theCompany that are based on the beliefs of management as well as assumptions madeby and information currently available to management.  In addition, in those and other portions ofthis document, the words “anticipate,” “believe,” “estimate,” “except,” “intend,”“should” and similar expressions, or the negative thereof, as they relate tothe Company or the Company’s management, are intended to identifyforward-looking statements.  Suchstatements reflect the current views of the Company with respect to futurelooking events and are subject to certain risks, uncertainties and assumptions.  Should one or more of these risks oruncertainties materialize or should underlying assumptions prove incorrectactual results may vary materially from those described herein as anticipated,believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements.

 

 

47

----

**Item 8.  Financial Statements andSupplementary Data.**

 

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

To the Board of Directors and Stockholders of AllianceBancorp, Inc of Pennsylvania:

We have audited the accompanying consolidated statement of financialcondition of Alliance Bancorp, Inc. of Pennsylvania and subsidiaries as ofDecember 31, 2007, and the related consolidated statements of income, changesin stockholders’ equity, and cash flows for the year then ended.  AllianceBancorp, Inc. of Pennsylvania’s management is responsible for these financial statements.  Our responsibility is to express an opinionon these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  Thecompany is not required to have, nor were we engaged to perform, an audit ofits internal control over financial reporting.  Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the company'sinternal control over financial reporting.  Accordingly, we express nosuch opinion.  An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of AllianceBancorp, Inc. of Pennsylvania and subsidiaries as of December 31, 2007, and theresults of their operations and their cash flows for the year then ended, inconformity with accounting principles generally accepted in the United Statesof America.

 

 

 

 

/s/Beard Miller CompanyLLP

 

Beard Miller Company LLP

Malvern, Pennsylvania

March 18, 2008

 

48

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

To the Board of Directors and Stockholders of

Alliance Bancorp, Inc. of Pennsylvania

Broomall, Pennsylvania

 

We have audited the accompanying consolidatedstatement of financial condition of Alliance Bancorp, Inc. of Pennsylvania andsubsidiaries (the “Company”) as of December 31, 2006, and the relatedconsolidated statement of income, changes in stockholders' equity and cashflows for the year then ended. These financial statements are the responsibilityof the Company's management. Our responsibility is to express an opinion onthese financial statements based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  The Company is notrequired to have, nor were we engaged to perform, an audit of its internal controlover financial reporting. Our audit included consideration of internal controlover financial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company's internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audit provides a reasonablebasis for our opinion.

 

In our opinion, such consolidated financialstatements present fairly, in all material respects, the financial position ofAlliance Bancorp, Inc. of Pennsylvania and subsidiaries as of December 31,2006, and the results of their operations and their cash flows for the year thenended, in conformity with accounting principles generally accepted in theUnited States of America.

 

As discussed in Note 2 to the consolidatedfinancial statements, the Company adopted Statement of Financial AccountingStandards No. 158, “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans” on December 31, 2006.

 

 

 

 

/s/ Deloitte & Touche LLP

 

Philadelphia, Pennsylvania

March 23, 2007

(March 18, 2008 as to the last paragraph of Note1)

 

 

49

----

 

**MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

Management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Exchange Act Rule 13a-15(f). The Company’s internal control overfinancial reporting includes those policies and procedures that (i) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the Company arebeing made only in accordance with authorizations of management and directorsof the Company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the Company’s assets that could have a material effect on the financialstatements.

 

Internal control over financial reporting isdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements prepared for externalpurposes in accordance with generally accepted accounting principles. Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Under the supervision and with the participation ofmanagement, including our principal executive officer and principal financialofficer, we conducted an evaluation of the effectiveness of our internalcontrol over financial reporting based on the framework in Internal Control —Integrated Framework issued by the Committee of Sponsoring Organizationsof the Treadway Commission. Based on our evaluation under the framework inInternal Control — Integrated Framework, management concluded thatour internal control over financial reporting was effective as of December 31,2007.

 

Thisannual report does not include an attestation report of the company’sregistered public accounting firm regarding internal control over financialreporting. Management’s report was not subject to attestation by the company’sregistered public accounting firm pursuant to temporary rules of the Securitiesand Exchange Commission that permit the company to provide only management’sreport in this annual report.

 

 

50

----

 

**Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries**

**Consolidated Statements of Financial Condition**

 
| *** ***                                                                                                                                                   | *** *** | *** *** | ** ** | **December 31,** | ** **      |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------------|------------|-----------------------|-----------------|
| **Assets**                                                                                                                                                     | ** **   | ** **   | ** ** | **2007**              | ** **      | **2006** |   |
|                                                                                                                                                           |         |         |       |                  |            |   |   |
| Cash and cash due from  depository institutions                                                                                                                | ** **   | ** **   |       | **$**                 | **3,917,772**   |   | $ | 3,105,561 |   |
| Interest bearing deposits  with depository institutions                                                                                                        | ** **   | ** **   |       | **38,161,428**        |            | 45,176,979 |   |
| Total cash and cash equivalents                                                                                                                                |         |         | ** ** | **42,079,200**        |            | 48,282,540 |   |
|                                                                                                                                                           |         |         |       |                  |            |   |   |
| Investment securities  available for sale                                                                                                                      | ** **   | ** **   |       | **45,613,876**        |            | 35,053,226 |   |
| Mortgage — backed  securities available for sale                                                                                                          | ** **   | ** **   |       | **35,631,823**        |            | 43,635,706 |   |
| Investment securities held to maturity   (fair value — 2007, $22,826,715; 2006, $24,888,591)                                                              |         |         |       | **22,247,271**        |            | 24,250,959 |   |
| Loans receivable - net of allowance for loan   losses — 2007, $2,831,065; 2006, $2,719,418                                                                |         |         |       | **256,932,165**       |            | 235,761,033 |   |
| Loans held for sale                                                                                                                                            | ** **   | ** **   |       | **—**            |            | 125,000 |   |
| Accrued interest  receivable                                                                                                                                   | ** **   | ** **   |       | **1,931,991**         |            | 1,931,600 |   |
| Premises and equipment —  net                                                                                                                             | ** **   | ** **   |       | **2,910,122**         |            | 3,143,240 |   |
| Federal Home Loan Bank  (FHLB) stock-at cost                                                                                                                   | ** **   | ** **   |       | **2,310,100**         |            | 2,548,500 |   |
| Bank owned life insurance                                                                                                                                      | ** **   | ** **   |       | **10,463,139**        |            | 10,102,712 |   |
| Deferred tax asset                                                                                                                                             | ** **   | ** **   |       | **3,588,683**         |            | 3,879,553 |   |
| Prepaid expenses and other  assets                                                                                                                             | ** **   | ** **   |       | **758,190**           |            | 1,635,749 |   |
|                                                                                                                                                           |         |         |       |                  |            |   |   |
| **Total Assets**                                                                                                                                               | ** **   | ** **   |       | **$**                 | **424,466,560** |   | $ | 410,349,818 |   |
|                                                                                                                                                           |         |         |       |                  |            |   |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                 |         |         |       |                  |            |   |   |
|                                                                                                                                                           |         |         |       |                  |            |   |   |
| **Liabilities**                                                                                                                                                |         |         |       |                  |            |   |   |
| Non–interest bearing  deposits                                                                                                                            | ** **   | ** **   |       | **$**                 | **16,839,970**  |   | $ | 21,948,062 |   |
| Interest bearing deposits                                                                                                                                      | ** **   | ** **   |       | **313,947,684**       |            | 311,853,876 |   |
| Total deposits                                                                                                                                                 |         |         | ** ** | **330,787,654**       |            | 333,801,938 |   |
|                                                                                                                                                           |         |         |       |                  |            |   |   |
| Demand notes issued to the  U.S. Treasury                                                                                                                      | ** **   | ** **   |       | **42,149**            |            | 38,033 |   |
| FHLB advances                                                                                                                                                  | ** **   | ** **   |       | **37,000,000**        |            | 37,171,822 |   |
| Accrued expenses and other  liabilities                                                                                                                        | ** **   | ** **   |       | **5,178,473**         |            | 5,838,059 |   |
|                                                                                                                                                           |         |         |       |                  |            |   |   |
| Total liabilities                                                                                                                                              |         |         | ** ** | **373,008,276**       |            | 376,849,852 |   |
|                                                                                                                                                           |         |         |       |                  |            |   |   |
| Commitments and  Contingencies (Note 10)                                                                                                                       |         |         |       |                  |            |   |   |
|                                                                                                                                                           |         |         |       |                  |            |   |   |
| **Stockholders’ Equity**                                                                                                                                  |         |         |       |                  |            |   |   |
| Common stock, $.01 par value; shares authorized —;   2007, 15,000,000; 2006, 10,000,000;   issued and outstanding — 2007, 7,225,000; 2006, 3,441,383 |         |         |       | **72,250**            |            | 34,414 |   |
| Additional paid-in capital                                                                                                                                     | ** **   | ** **   |       | **24,041,025**        |            | 7,598,062 |   |
| Retained earnings —  partially restricted                                                                                                                 | ** **   | ** **   |       | **28,974,883**        |            | 28,537,679 |   |
| Common stock acquired by  ESOP                                                                                                                                 | ** **   | ** **   |       | **(843,108**          | **)**           | — |   |
| Accumulated other  comprehensive loss                                                                                                                          | ** **   | ** **   |       | **(786,766**          | **)**           | (2,670,189 | ) |
|                                                                                                                                                           |         |         |       |                  |            |   |   |
| Total stockholders’ equity                                                                                                                                |         |         | ** ** | **51,458,284**        |            | 33,499,966 |   |
|                                                                                                                                                           |         |         |       |                  |            |   |   |
| **Total Liabilities and  Stockholders’ Equity**                                                                                                           | ** **   | ** **   |       | **$**                 | **424,466,560** |   | $ | 410,349,818 |   |
|                                                                                                                                                           |         |         |       |                  |            |   |   |

* *

*See notes to consolidated financial statements.*

 

51

----

 

**Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries**

**Consolidated Statements of Income**

 
| *** ***                                             | *** *** | ** ** | ** ** | **Years Ended December 31,** | ** **     |
|----------------------------------------------------------|--------------|------------|------------|-----------------------------------|----------------|
| ** **                                               | ** **   | ** ** | ** ** | **2007**                          | ** **     | **2006** | ** ** |
|                                                     |         |       |       |                              |           |   |   |
| **Interest and Fees and Dividend  Income**               |         |       |       |                              |           |   |   |
| Loans                                                    | ** **   | ** ** |       | **$**                             | **16,965,603** |   | 15,535,078 |   |
| Mortgage-backed securities                               | ** **   | ** ** |       | **1,815,539**                     |           | 2,183,876 |   |
| Investment securities:                                   |         |       |       |                              |           |   |   |
| Taxable                                                  |         |       | ** ** | **1,146,983**                     |           | 911,893 |   |
| Tax - exempt                                             |         |       | ** ** | **1,058,705**                     |           | 1,222,840 |   |
| Dividends                                                |         |       | ** ** | **1,128,077**                     |           | 1,084,650 |   |
| Balances due from depository  institutions               | ** **   | ** ** |       | **2,225,217**                     |           | 814,365 |   |
| Total interest and dividend income                       |         |       | ** ** | **24,340,124**                    |           | 21,752,702 |   |
|                                                     |         |       |       |                              |           |   |   |
| **Interest Expense**                                     |         |       |       |                              |           |   |   |
| Deposits                                                 | ** **   | ** ** |       | **11,618,158**                    |           | 8,350,033 |   |
| FHLB advances and other borrowed money                   | ** **   | ** ** |       | **2,380,488**                     |           | 2,981,408 |   |
| Total interest expense                                   |         |       | ** ** | **13,998,646**                    |           | 11,331,441 |   |
|                                                     |         |       |       |                              |           |   |   |
| **Net Interest Income**                                  | ** **   | ** ** |       | **10,341,478**                    |           | 10,421,261 |   |
| **Provision for Loan Losses**                            | ** **   | ** ** |       | **120,000**                       |           | 60,000 |   |
| **Net Interest Income After  Provision for Loan Losses** | ** **   | ** ** |       | **10,221,478**                    |           | 10,361,261 |   |
|                                                     |         |       |       |                              |           |   |   |
| **Other Income**                                         |         |       |       |                              |           |   |   |
| Service charges on deposit accounts                      |         |       | ** ** | **345,804**                       |           | 321,562 |   |
| Management fees                                          |         |       | ** ** | **420,000**                       |           | 480,000 |   |
| Other fee income                                         |         |       | ** ** | **158,351**                       |           | 148,123 |   |
| Gain on sale of loans                                    |         |       | ** ** | **30,090**                        |           | 14,529 |   |
| Gain on sale of securities, net                          |         |       | ** ** | **—**                        |           | 1,719 |   |
| Gain on sale of OREO                                     |         |       | ** ** | **20,689**                        |           | 121,936 |   |
| Impairment charge on securities                          |         |       | ** ** | **(859,538**                      | **)**          | **—** | ** ** |
| Increase in cash surrender value of life insurance       |         |       | ** ** | **360,427**                       |           | 363,288 |   |
| Other                                                    |         |       | ** ** | **8,091**                         |           | 1,129 |   |
| Total other income                                       |         |       | ** ** | **483,914**                       |           | 1,452,286 |   |
|                                                     |         |       |       |                              |           |   |   |
| **Other Expenses**                                       |         |       |       |                              |           |   |   |
| Salaries and employee benefits                           | ** **   | ** ** |       | **5,496,754**                     |           | 6,003,410 |   |
| Expenses of premises and equipment                       | ** **   | ** ** |       | **1,910,554**                     |           | 1,858,338 |   |
| Advertising and marketing                                | ** **   | ** ** |       | **320,244**                       |           | 655,373 |   |
| Professional fees                                        | ** **   | ** ** |       | **434,497**                       |           | 367,610 |   |
| Loan and OREO expense                                    | ** **   | ** ** |       | **43,783**                        |           | 97,524 |   |
| Other noninterest expense                                |         |       | ** ** | **1,601,861**                     |           | 1,527,626 |   |
| Total other expenses                                     |         |       | ** ** | **9,807,693**                     |           | 10,509,881 |   |
|                                                     |         |       |       |                              |           |   |   |
| **Income Before Income Taxes**                           | ** **   | ** ** |       | **897,699**                       |           | 1,303,666 |   |
|                                                     |         |       |       |                              |           |   |   |
| **Income Tax Benefit**                                   | ** **   | ** ** |       | **(157,243**                      | **)**          | (67,000 | ) |
|                                                     |         |       |       |                              |           |   |   |
| **Net Income**                                           | ** **   | ** ** |       | **$**                             | **1,054,942**  |   | $ | 1,370,666 |   |
|                                                     |         |       |       |                              |           |   |   |
| **Basic and Diluted Earnings per  Share**                | ** **   | ** ** |       | **$**                             | **0.15**       |   | $ | 0.19 |   |

 

 

*See notes to consolidated financial statements.*

 

 

52

----

 

**Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries**

**Consolidated Statements of Changes in Stockholders’ Equity**

***Years Ended December 31, 2007 and 2006***

 
| ** **                                                                           | ** ** | **Common   Stock** | ** ** | **Additional Paid-in   Capital** | ** ** | **Retained Earnings** | ** ** | **Unearned shares   held by   ESOP** | ** **     | **Accumulated Other Comprehensive (Loss)** | ** ** | **Total Stockholders’ Equity** | ** ** | **Comprehensive Income** | ** **     |
|--------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------------------|------------|-----------------------|------------|--------------------------------------|----------------|--------------------------------------------|------------|-------------------------------------|------------|--------------------------|----------------|
|                                                                                 |       |               |       |                             |       |                  |       |                                 |           |                                       |       |                                |       |                     |           |
| Balance, January 1, 2006                                                        |       | $                  | 34,414     |                             | $          | 7,598,062             |       | $                                    | 28,405,911     |                                       | $          | —-                             |       | $                        | (1,911,244     | ) | $ | 34,127,143 |   |   |   |
|                                                                                 |       |               |       |                             |       |                  |       |                                 |           |                                       |       |                                |       |                     |           |
| Net income                                                                           |       |               |       |                             |       | 1,370,666             |       |                                 |           |                                       |       | 1,370,666                           |       | $                        | 1,370,666      |   |
| Dividends declared-$0.16 per share                                                   |       |               |       |                             |       | (1,238,898            | )          |                                 |           |                                       |       | (1,238,898                          | )          |                     |           |
| Change in additional  minimum liability for retirement plans, net of tax             |       |               |       |                             |       |                  |       |                                 |           | 188,020                                    |       | 188,020                             |       | 188,020                  |           |
| Change in net  unrealized gain on securities available for sale-net of tax (1)       |       |               |       |                             |       |                  |       |                                 |           | 64,388                                     |       | 64,388                              |       | 64,388                   |           |
| FAS 158 Adjustment, net of tax                                                       |       |               |       |                             |       |                  |       |                                 |           | (1,011,353                                 | )          | (1,011,353                          | )          |                     |           |
| **Balance, December 31, 2006**                                                  | ** ** | **$**              | **34,414** | ** **                       | **$**      | **7,598,062**         | ** ** | **$**                                | **28,537,679** | ** **                                 | **$**      | **—-**                         | ** ** | **$**                    | **(2,670,189** | **)** | **$** | **33,499,966** | ** ** | **$** | **1,623,074** | ** ** |
|                                                                                 |       |               |       |                             |       |                  |       |                                 |           |                                       |       |                                |       |                     |           |
| **Proceeds  from the sale of common  stock, net**                                    | ** ** | **37,836**         | ** ** | **16,446,963**                   | ** ** | ** **            | ** ** | ** **                           | ** **     | ** **                                 | ** ** | **16,484,799**                      | ** ** | ** **               | ** **     |
| **Common stock acquired by ESOP**                                                    |       |               |       |                             |       |                  | ** ** | **(903,330**                         | **)**          |                                       | ** ** | **(903,330**                        | **)**      | ** **               | ** **     |
| **ESOP shares committed to be released**                                             | ** ** | ** **         |       | **(4,000**                       | **)**      |                  | ** ** | **60,222**                           |           |                                       | ** ** | **56,222**                          | ** ** | ** **               | ** **     |
| **Net income**                                                                       | ** ** | ** **         |       |                             |       | **1,054,942**         |       |                                 |           | ** **                                 | ** ** | **1,054,942**                       | ** ** | **1,054,942**            | ** **     |
| **Dividends declared-$0.19 per share**                                               |       |               | ** ** | ** **                       |       | **(617,738**          | **)**      |                                 | ** **     | ** **                                 | ** ** | **(617,738**                        | **)**      | ** **               | ** **     |
| **Change  in liability for retirement plans,   net of tax**                          | ** ** | ** **         | ** ** | ** **                       | ** ** | ** **            | ** ** | ** **                           | ** **     | **542,999**                                | ** ** | **542,999**                         | ** ** | **542,999**              | ** **     |
| **Change  in net unrealized gain on securities available for sale-net of   tax (1)** |       |               |       |                             |       |                  |       |                                 | ** **     | **1,340,424**                              | ** ** | **1,340,424**                       | ** ** | **1,340,424**            | ** **     |
| **Balance, December 31, 2007**                                                  | ** ** | **$**              | **72,250** | ** **                       | **$**      | **24,041,025**        | ** ** | **$**                                | **28,974,883** | ** **                                 | **$**      | **(843,108**                        | **)**      | **$**                    | **(786,766**   | **)** | **$** | **51,458,284** | ** ** | **$** | **2,938,365** | ** ** |

----

 
| (1) Disclosure of reclassification , net of tax  for years ended: | ** **                                                                                                                               | **2007**   | ** **        | **2006** | ** ** |
|------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|----------|------------|
|                                                                   | Net unrealized gains arising during the year                                                                                             | ** ** | **$773,129**      |     | $65,523    |   |
|                                                                   | Add:  reclassification adjustment for impairment charge included in   net income (net of tax benefit of ($292,243) and $0, respectively) | ** ** | **567,295**       |     | -0-        |   |
|                                                                   | Less:  reclassification adjustment for net gains included   in net income (net of tax $0 and $584, respectively).                        | ** ** | **–0–** |     | 1,135      |   |
|                                                                   |                                                                                                                                     |       |              |     |       |
|                                                                   | Change in net unrealized gain (losses) on securities  available for sale                                                                 | ** ** | **$1,340,424**    |     | $64,388    |   |

 

*See notesto consolidated financial statements*.

 

 

53

----

 

 

 

 

 

**AllianceBancorp, Inc. of Pennsylvania and Subsidiaries**

**ConsolidatedStatements of Cash Flows**

 
| *** ***                                                                     | ** ** | **Years Ended December 31,** | ** **     |
|----------------------------------------------------------------------------------|------------|-----------------------------------|----------------|
| ** **                                                                       | ** ** | **2007**                          | ** **     | **2006** | ** ** |
|                                                                             |       |                              |           |   |   |
| **Operating Activities**                                                         |       |                              |           |   |   |
| Net income                                                                       |       | **$**                             | **1,054,942**  |   | $ | 1,370,666 |   |
| Adjustments to  reconcile net income to cash   provided by operating activities: |       |                              |           |   |   |
| Provision for:                                                                   |       |                              |           |   |   |
| Loan losses                                                                      | ** ** | **120,000**                       |           | 60,000 |   |
| Depreciation and  amortization                                                   | ** ** | **655,045**                       |           | 646,186 |   |
| Gain on sale of loans                                                            |       | **(30,090**                       | **)**          | (14,529 | ) |
| Impairment charge on securities                                                  |       | **859,538**                       |           | — |   |
| Gain on sale of securities                                                       |       | —                            |           | (1,719 | ) |
| ESOP shares committed to be released                                             | ** ** | **56,222**                        | ** **     | — |   |
| Gain on sale of OREO                                                             |       | **(20,689**                       | **)**          | (121,936 | ) |
| Origination of loans held for sale                                               |       | **(4,760,700**                    | **)**          | (2,429,800 | ) |
| Deferred tax benefit                                                             |       | **(679,378**                      | **)**          | (371,000 | ) |
| Loans sold in the secondary market                                               |       | **4,761,794**                     |           | 2,319,318 |   |
| Changes in assets and liabilities which provided  (used) cash:                   |       |                              |           |   |   |
| Accrued expenses  and other liabilities                                          | ** ** | **163,141**                       |           | 226,239 |   |
| Prepaid expenses  and other assets                                               | ** ** | **877,559**                       |           | (1,001,740 | ) |
| Increase in cash  surrender value of bank owned life insurance                   |       | **(360,427**                      | **)**          | (363,288 | ) |
| Accrued interest  receivable                                                     | ** ** | **(391**                          | **)**          | (88,519 | ) |
| Net cash  provided by operating activities                                       | ** ** | **2,696,566**                     |           | 229,878 |   |
|                                                                             |       |                              |           |   |   |
| **Investing Activities**                                                         |       |                              |           |   |   |
| Purchase of investment securities-available for sale                             |       | **(27,980,000**                   | **)**          | (7,000,000 | ) |
| Purchase of investment securities-held to maturity                               |       | —                            |           | (1,390,000 | ) |
| Purchase of mortgage-backed securities                                           |       | —                            |           | (6,451,397 | ) |
| Loans originated and acquired                                                    |       | **(72,272,204**                   | **)**          | (73,340,821 | ) |
| Proceeds from maturities and calls of investment  securities                     |       | **19,639,274**                    |           | 20,028,032 |   |
| Proceeds from the sale of securities available for  sale                         |       | **—**                        |           | 1,001,719 |   |
| Redemption of FHLB stock                                                         |       | **238,400**                       |           | 189,600 |   |
| Principal  repayments of:                                                        |       |                              |           |   |   |
| Loans                                                                            | ** ** | **51,002,441**                    |           | 61,813,795 |   |
| Mortgage-backed  securities                                                      | ** ** | **8,959,053**                     |           | 11,412,745 |   |
| Purchase of premises and equipment                                               |       | **(421,927**                      | **)**          | (645,383 | ) |
| Proceeds from sale of OREO                                                       |       | **153,316**                       |           | 1,916,936 |   |
| Net cash (used  in) provided by investing activities                             | ** ** | **(20,681,647**                   | **)**          | 7,535,226 |   |
|                                                                             |       |                              |           |   |   |
| **Financing Activities**                                                         |       |                              |           |   |   |
| Dividends paid                                                                   |       | **(617,738**                      | **)**          | (1,238,898 | ) |
| (Decrease) increase in deposits                                                  |       | **(3,014,284**                    | **)**          | 36,091,940 |   |
| Stock issuance                                                                   | ** ** | **16,484,799**                    | ** **     | — |   |
| Stock acquired by ESOP                                                           | ** ** | **(903,330**                      | **)**          | — |   |
| Demand notes issued to the U.S. Treasury                                         |       | **4,116**                         |           | (280,736 | ) |
| Repayments of FHLB advances                                                      |       | **(171,822**                      | **)**          | (15,010,604 | ) |
| Net cash  provided by financing activities                                       | ** ** | **11,781,741**                    |           | 19,561,702 |   |
|                                                                             |       |                              |           |   |   |
| **(Decrease) increase in Cash and Cash Equivalents**                             |       | **(6,203,340**                    | **)**          | 27,326,806 |   |
| **Cash and Cash Equivalents, Beginning of Year**                                 |       | **48,282,540**                    |           | 20,955,734 |   |
| **Cash and Cash Equivalents, End of Year**                                       |       | **$**                             | **42,079,200** |   | $ | 48,282,540 |   |
| ** **                                                                       | ** ** | ** **                        | ** **     | ** ** | ** ** |
| **Supplemental Disclosures of Cash Flow  Information-**                          |       |                              |           |   |   |
| Cash paid during the period for:                                                 |       |                              |           |   |   |
| Interest  (credited and paid)                                                    | ** ** | **$**                             | **13,997,501** |   | $ | 11,331,442 |   |
| Income taxes                                                                     | ** ** | **$**                             | **450,000**    |   | $ | 130,000 |   |
|                                                                             |       |                              |           |   |   |
| **Supplemental Disclosure of Noncash Investing  Activity-**                      |       |                              |           |   |   |
| Loans transferred to other real estate owned                                     |       | **$**                             | **132,627**    |   | $ | — |   |

 

*See notesto consolidated financial statements*.

 

 

54

----

 

**Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries**

**Notes toConsolidated Financial Statements**

 

**1.    Organizational Structure and Nature ofOperations**

 

In 1995, AllianceBank, formerly Greater Delaware Valley Savings Bank, (the “Bank”) completed areorganization from a Pennsylvania chartered mutual savings bank to aPennsylvania chartered mutual holding company known as Greater Delaware ValleyHoldings, a Mutual Company (the “Holding Company”) (“Reorganization”).  As part of the Reorganization, the Bankorganized a Pennsylvania chartered stock savings bank and transferredsubstantially all of its assets and liabilities, including all of itsdeposit-taking, lending and other banking functions and its corporate name, tothe newly created stock savings bank in exchange for 2,753,625 shares of itscommon stock. Concurrent with the Reorganization, the Bank sold 682,500 sharesof common stock in a public offering at a price of $9.52 per share resulting in$6,500,000 of additional equity capital before offering expenses. The costs ofissuing the common stock were deducted from the sale proceeds.

 

Subsequent to theReorganization, the existing rights of the Bank’s depositors upon liquidationas of the effective date have been transferred to the Holding Company andrecords maintained to ensure such rights receive statutory priority in theevent of a future mutual stock conversion, or in the more unlikely event of theHolding Company’s liquidation.

 

On June 5, 2006, the Bank announced its decision to form a mid-tierstock holding company and to offer and sell additional shares. The Boards ofDirectors of the Bank and the Holding Company adopted an Agreement and Plan ofReorganization (“Reorganization Plan”) and a Plan of Additional Stock Issuance(“Stock Plan”) pursuant to which (i) a mid-tier stock holding company,Alliance Bancorp, Inc, of Pennsylvania (“Alliance Bancorp” or the Company”) wasformed; (ii) the issued and outstanding shares of common stock of the Bankwere exchanged for shares of common stock of Alliance Bancorp; and (iii) additionalshares of Alliance Bancorp were offered and sold to certain depositors of theBank and others in accordance with the Stock Plan, and applicable federalbanking regulation. As part of the Reorganization Plan, the Holding Companyconverted to a federal charter and changed its name to Alliance Mutual HoldingCompany.

 

Alliance Bancorp filed a registration statement with the Securities andExchange Commission with respect to the stock offering. Proxy and offeringmaterials setting forth detailed information relating to the ReorganizationPlan and Stock Plan were sent to shareholders of the Bank for theirconsideration and approval. Shareholders of the Bank approved theReorganization Plan at a special meeting of shareholders held on December 15,2006.  The reorganization and stockoffering were completed on January 30, 2007.  In the offering,Alliance Bancorp sold 1,807,339 shares at a purchase price of $10.00 per shareand realized $16.5 million in net offering proceeds.  In addition, Alliance Bancorp issued5,417,661 shares of common stock in exchange for former outstanding shares ofthe Bank.  Each share of the Bank’scommon stock was converted into 2.09945 shares of Alliance Bancorp.  Lastly, an Employee Stock Ownership Program(ESOP) was established and the Bank borrowed $903,330 from Alliance Bancorp topurchase 90,333 shares of common stock. Principal and interest payments of the loan will be made quarterly overa term of 15 years at an interest rate of 8.25%.

 

**Nature ofOperations**— TheBank is principally in the business of attracting deposits through its branchoffices and investing those deposits together with funds from borrowings andoperations in single-family residential, commercial real estate, commercialbusiness and consumer loans. The Bank is primarily supervised by the FederalDeposit Insurance Corporation (“FDIC”) and the Pennsylvania Department ofBanking.  The Company and the HoldingCompany are supervised by the Office of Thrift Supervision. 

 

As a result of theexchange of shares discussed above, all per share amounts for 2006 have beenadjusted for the exchange completed on January 30, 2007.

 

**2.    Summary of Significant Accounting Policies**

 

**Basis ofPresentation and Consolidation** - The consolidated financial statements of theCompany include the accounts of the Bank, Alliance Delaware Corporation, whichholds and manages certain investment and mortgage-backed securities, andAlliance Financial and Investment Services LLC which participates in commissionfees from non-insured alternative investment products, all of which are whollyowned subsidiaries of the Bank. All significant intercompany balances andtransactions have been eliminated in consolidation.

 

**Use ofEstimates in the Preparation of Financial Statements****— The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities. It also requires the disclosure of contingent assets and liabilities asof the date of the financial statements and the reported amounts of income andexpenses during the reporting period. Actual results could 

 

 

 

55

----

 

differ from thoseestimates. Material estimates that are particularly susceptible to significantchange in the near term relate to the determination of the allowance for loanlosses, deferred tax assets and evaluation of investment securities for otherthan temporary impairment.

 

**SegmentInformation —**TheBank has one reportable segment, “Community Banking.”  All of the Banks activities are interrelated,and each activity is dependent and assessed based on how each of the activitiesof the Bank supports the others.  Forexample, lending is dependent upon the ability of the Bank to fund itself withdeposits and other borrowings and manage interest rate and credit risk.  Accordingly, all significant operatingdecisions are based upon analysis of the Bank as one segment or unit.

 

The Bank operatesonly in the U.S. domestic market, primarily in Pennsylvania’s Delaware andChester Counties.  For the years ended December 31,2007, and 2006, there was no one customer that accounted for more than 10% ofthe Bank’s revenue.

 

**Cash andCash Equivalents** —For purposes of reporting cash flows, cash and cash equivalents include cashand amounts due from depository institutions and interest-bearing deposits withdepository institutions.  As of December 31,2007, the Bank’s minimum reserve balance with the Federal Reserve Bank was$2,868,000.

 

**Investmentand Mortgage-Backed Securities** — The Bank classifies and accounts for debt andequity securities as follows:

 

·                  *Securities Held to Maturity* - Securities held to maturity are stated at cost,adjusted for unamortized purchase premiums and discounts, based on the positiveintent and the ability to hold these securities to maturity considering allreasonably foreseeable conditions and events.

 

·                  *Securities Available for Sale* - Securities available for sale, carried at fairvalue, are those securities management might sell in response to changes inmarket interest rates, increases in loan demand, changes in liquidity needs andother conditions.  Unrealized gains andlosses, net of tax, are reported as a net amount in other comprehensive income(loss) until realized.

 

Purchase premiumsand discounts are amortized to income over the life of the related securityusing the interest method.  The adjustedcost of a specific security sold is the basis for determining the gain or losson the sale.

 

On November 3, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Nos. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments.

 

The followingtable shows the fair value and unrealized losses on investments, aggregated byinvestment category and the length of time that individual securities have beencontinuous unrealized loss position.

 

 

*** ***
| ** **                          | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| ***(Dollars in Thousands)***        | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Less than 12 Months**     | ** ** | **12 Months or Longer** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Fair**

**Value**         | ** ** | **Gross Unrealized Losses** | ** ** | **Fair**

**Value** | ** ** | **Gross Unrealized Losses** | ** ** | **Total**

**Fair**

**Value** | ** ** | **Total Unrealized Losses** | ** ** |
| ** **                          | ** ** | **(In Thousands)**          | ** ** |
| **Securities Available for Sale**   | ** ** |                        |       |   |   |   |   |   |   |   |   |   | ** ** |
| U.S. Government obligations         | ** ** | $                           | —     |   | $ | — |   | $ | 1,998 |   | $ | 1 |   | $ | 1,998 |   | $ | 1 | ** ** |
| Mortgage-backed securities          | ** ** | 3,440                       |       | 7 |   | 15,028 |   | 225 |   | 18,468 |   | 232 | ** ** |
| Total securities available for sale | ** ** | $                           | 3,440      |   | $ | 7 |   | $ | 17,026 |   | $ | 226 |   | $ | 20,466 |   | $ | 233 | ** ** |
| ** **                          | ** ** |                        |       |   |   |   |   |   |   |   |   |   | ** ** |
| **Securities Held to Maturity**     | ** ** |                        |       |   |   |   |   |   |   |   |   |   | ** ** |
| Municipal obligations               | ** ** | $                           | 1,014      |   | $ | 12 |   | $ | 1,389 |   | $ | 31 |   | $ | 2,403 |   | $ | 43 | ** ** |

 

 

 

56

----

 

** **
| ** **                          | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| ***(Dollars in Thousands*****)**    | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Less than 12 Months**     | ** ** | **12 Months or Longer** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Fair**

**Value**         | ** ** | **Gross Unrealized Losses** | ** ** | **Fair**

**Value** | ** ** | **Gross Unrealized Losses** | ** ** | **Total**

**Fair**

**Value** | ** ** | **Total Unrealized Losses** | ** ** |
| ** **                          | ** ** | **(In Thousands)**          | ** ** |
| **Securities Available for Sale**   |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government obligations         |       | $                           | 3,986      |   | $ | 12 |   | $ | 10,872 |   | $ | 127 |   | $ | 14,858 |   | $ | 139 |   |
| Mutual funds                        |       | —                      |       | — |   | 19,195 |   | 807 |   | 19,195 |   | 807 |   |
| Mortgage-backed securities          |       | 9,199                       |       | 35 |   | 32,490 |   | 930 |   | 41,689 |   | 965 |   |
| Total securities available for sale |       | $                           | 13,185     |   | $ | 47 |   | $ | 62,557 |   | $ | 1,864 |   | $ | 75,742 |   | $ | 1,911 |   |
|                                |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| **Securities Held to Maturity**     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Municipal obligations               |       | $                           | 1,366      |   | $ | 25 |   | $ | 1,966 |   | $ | 21 |   | $ | 3,332 |   | $ | 46 |   |

 

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

As of December 31, 2007 management believes that the estimated fair value of the securities disclosed above is primarily dependent upon the movement in market interest rates particularly given the negligible inherent credit risk associated with these securities. These investment securities are comprised of securities that are rated investment grade by at least one bond credit rating service. Although the fair value will fluctuate as the market interest rates move, management believes that these fair values will recover as the underlying portfolios mature and are reinvested in market rate yielding investments. As of December 31, 2007, there were 2 U.S. government obligations, 28 mortgage-backed securities, and 5 municipal obligations, which were in an unrealized loss position.  The Company has the ability and intent to hold these securities until such time as the value recovers or the securities mature. Management does not believe any individual unrealized loss as of December 31, 2007 represents an other-than-temporary impairment.

 

Due to the continued decline in the fair value of the Company’sinvestment in its $20 million mutual funds portfolio, the Company hasidentified the impairment of these securities as other than temporary and hasrecorded the December 31, 2007 loss of $860,000 as a charge againstoperating results.

 

**Loans andLoans Held for Sale**— The Bank grants mortgage, commercial and consumer loans to customers. Asubstantial portion of the loan portfolio is represented by mortgage loans insoutheastern Pennsylvania. The ability of the Bank’s debtors to honor theircontract is dependent upon the real estate and general economic conditions.Loans originated and intended for sale in the secondary market are carried atthe lower of cost or estimated fair value in aggregate. Net unrealized losses,if any, are recognized through a valuation allowance by charges to income. TheBank defers all loan fee income, net of certain direct loan origination costs.The balance is accreted into income as a yield adjustment over the life of theloan using the interest method.

 

**Allowancefor Loan Losses** —The allowance for loan losses is increased by charges to income and decreasedby chargeoffs (net of recoveries). Allowances are provided for specific loans when losses are probable andcan be estimated.  When this occurs,management considers the remaining principal balance, fair value and estimatednet realizable value of the property collateralizing the loan.  Current and future operating and/or salesconditions are also considered.  Theseestimates are susceptible to changes that could result in material adjustmentsto results of operations.  Recovery of thecarrying value of such loans is dependent to a great extent on economic, operatingand other conditions that may be beyond management’s control.

 

General loan lossreserves are established as an allowance for losses based on inherent probablerisk of loss in the loan portfolio.  Inassessing risk, management considers historical experience, volume andcomposition of lending conducted by the Bank, industry standards, status ofnonperforming loans, general economic conditions as they relate to the marketarea and other factors related to the collectibility of the Bank’s loan portfolio.

 

Impaired loans arepredominantly measured based on the fair value of the collateral. The provisionfor loan losses charged to expense is based upon past loan loss experience andan evaluation of probable losses and impairment existing in the current loanportfolio.  A loan is considered to beimpaired when, based upon current information and events, it is probable thatthe Bank will be unable to collect all amounts due according to the originalcontractual terms of the loan.  Aninsignificant delay or insignificant 

 

 

 

57

----

 

shortfall inamounts of payments does not necessarily result in the loan being identified asimpaired.  For this purpose, delays lessthan 90 days are considered to be insignificant.  Large groups of smaller balance homogeneousloans, including residential real estate and consumer loans, are collectivelyevaluated for impairment, except for loans restructured under a troubled debtrestructuring.

 

**AccruedInterest Receivable**— Interest on loans is recognized as earned. Accrual of loan interest is discontinued and a reserve established onexisting accruals if management believes that after considering collateralvalue, economic and business conditions and collection efforts, the borrower’s financialcondition is such that collection of interest is doubtful.

 

**Purchase Discounts and Premiums** — Purchase discounts and premiums on loans and mortgage-backed securities purchased are amortized over the expected average life of the loans using the interest method.  The mortgage-related securities of the Bank which are held to maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts.

 

**OtherReal Estate Owned**— Other real estate acquired through, or in lieu of, foreclosure is initiallyrecorded at the lower of book value or fair value at the date of acquisition,establishing a new cost basis.  Revenuesand expenses from operations are included in other income.  Additions to the valuation allowance areincluded in other expense.  Subsequent toforeclosure, valuations are periodically performed by management and anallowance for losses is established, if necessary, by a charge to operations ifthe carrying value of a property exceeds its estimated fair value lessestimated costs to sell.

 

**CashSurrender Value of Life Insurance —**The Bank is the beneficiary of insurance policies onthe lives of officers of the Bank. The Bank has recognized the amount thatcould be realized under the insurance policies as an asset in the statement offinancial condition.

 

**Premisesand Equipment** —Land is carried at cost. Premises and equipment are recorded at cost, lessaccumulated depreciation. Depreciation is computed using the straight-linemethod over the expected useful lives of the related assets which range fromtwo to 40 years.  Amortization ofleasehold improvements is computed using the straight-line method over theshorter of the useful lives of the improvements or the remaining leaseterm.  The costs of maintenance and repairsare expensed as they are incurred, and renewals and betterment’s arecapitalized.

 

**InterestRate Risk** — TheBank is engaged principally in providing first-mortgage loans to individualsand commercial enterprises.  At December 31,2007, the Bank’s average interest-earning assets were approximately $398.0million having a weighted average effective yield of 6.02% and averageinterest-bearing liabilities were approximately $347.5 million having aweighted average effective cost of 3.74%. In general, interest-sensitive liabilities have a shorter duration thaninterest-earning assets.  The shorterduration of the interest-sensitive liabilities indicates that the Bank isexposed to interest rate risk because, in a rising rate environment,liabilities will be repricing faster at higher interest rates, thereby reducingthe market value of long-term assets and net interest income. As a consequence,management monitors the maturity and repricing structure of the Bank’s assetsand liabilities in order to implement measures designed to reduce the interestrate sensitivity gap.

 

**IncomeTaxes** — Deferredincome taxes are recognized for the tax consequences of “temporary differences”by applying enacted statutory tax rates applicable to future years todifferences between the financial statement carrying amounts and the tax basisof existing assets and liabilities.  Theeffect on deferred taxes of a change in tax rates is recognized in income inthe period that includes the enactment date.

 

The Bank has alsoentered into a tax sharing agreement (under the Internal Revenue Section 1552)with the Holding Company and Alliance Delaware Corporation.  The agreement provides that the tax liabilityshall be apportioned among the members of the group in accordance with theratio which that portion of the consolidated taxable income attributed to eachmember of the group having taxable income bears to the consolidated taxableincome.  The Bank had $-0- and $44,000due to the Holding Company at December 31, 2007 and 2006, respectively.

 

**Accounting for Stock-Based Compensation** — The Bank adopted SFAS No. 123(R) “Share-BasedPayment” on January 1, 2006. Accordingly, the Bank recognizes an expense over the required serviceperiod for any stock options granted, modified, cancelled, or repurchased afterthat date and for the portion of grants for which the requisite service has notyet been rendered, based on the grant-date fair value of those awards.  Adoption of SFAS No. 123(R) did nothave a material impact to the consolidated financial statements, since alloutstanding options granted to date are fully vested.

 

Under the 1996Stock Option Plan (the “Plan”) approved by the Bank’s stockholders, commonstock totaling 68,250 shares had been reserved for issuance pursuant to thePlan. Stock options are generally granted at exercise prices not less than thefair value of common stock on the date of grant, and vest at the rate of 33 1/3percent per year, commencing one year from the date of grant. The following isa summary of transactions under the Plan (number of option shares, exercisedprice range, and weighted average 

 

 

 

58

----

 

exercise price pershare have been adjusted for the January 30, 2007 stock offering):

 
| ** **                                     | ** ** | ** **         | ** ** | ** **       | ** ** | **Weighted  Average** | ** ** |
|------------------------------------------------|------------|--------------------|------------|------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **Number  of**     | ** ** | **Exercise**     | ** ** | **Exercise  Price**   | ** ** |
| ** **                                     | ** ** | **Option  Shares** | ** ** | **Price  Range** | ** ** | **per  Share**        | ** ** |
|                                           |       |               |       |             |       |                  |       |
| Outstanding at January 1, 2006            |       | 3,306              |       | $                | 5.01       |                  | $          | 4.93 |   |
| Canceled                                       |       | (3,306             | )          | 5.01             |       | 4.93                  |       |
| Outstanding at December 31, 2006 and 2007 |       | —             |       | $                | —     |                  | $          | — |   |

 

Prior to January 1,2006, the Bank applied APB Opinion No. 25 in accounting for stock optionsand, accordingly, no compensation expense was recognized in the consolidatedfinancial statements at the date of the grant. However, as a result of cancellations of stock options, which the Bankconsiders to be modifications to the terms of original grant, the Bankrecognized $22,000 in 2006 as compensation expense.  This amount reflects the cash paid to theoptionee for the cancellation of the option.

 

There were nostock options granted in 2007 or 2006.

 

**Earnings per Share*****—*** There areno convertible securities which would affect the net income (numerator) incalculating basic and diluted earnings per share.  Basic and diluted earnings per share data arebased on the weighted-average number of shares outstanding during eachperiod.  Diluted earnings per share arefurther adjusted for potential common shares that were dilutive and outstandingduring the period.  The calculation ofearnings per share has been adjusted for the exchange and additional shareissuance in the reorganization and offering completed on January 30, 2007.

 

The following table sets forth the composition of the weighted averageshares (denominator) used in the basic and diluted earnings per sharecomputation.

 
| ** **                                          | ** ** | **For the Years  Ended**

** December 31,** | ** **    |
|-----------------------------------------------------|------------|-------------------------------------------------------|---------------|
| ** **                                          | ** ** | ** **                                            |
|                                                | ** ** | **2007**                                              | ** **    | **2006** | ** ** |
|                                                |       |                                                  |          |   |   |
| Net Income                                          | ** ** | **$**                                                 | **1,054,942** |   | $ | 1,370,666 |   |
|                                                |       |                                                  |          |   |   |
| Weighted average shares outstanding                 | ** ** | **7,225,000**                                         |          | 3,441,383 |   |
| Exchange rate from offering                         | ** ** | **—**                                            |          | 2.0995 |   |
| Adjusted weighted average shares outstanding        | ** ** | **7,225,000**                                         |          | 7,225,000 |   |
| Average unearned ESOP shares                        | ** ** | **(87,322**                                           | **)**         | — |   |
| Weighted average shares outstanding — basic    | ** ** | **7,137,678**                                         |          | 7,225,000 |   |
| Effect of stock options adjusted for exchange rate  | ** ** | **—**                                            |          | 1,973 |   |
| Weighted average shares outstanding — dilutive | ** ** | **7,137,678**                                         |          | 7,226,973 |   |
|                                                |       |                                                  |          |   |   |
| Basic earnings per share                            | ** ** | **$**                                                 | **0.15**      |   | $ | 0.19 |   |
| Dilutive earnings per share                         | ** ** | **$**                                                 | **0.15**      |   | $ | 0.19 |   |

 

**ComprehensiveIncome —** The Bankis required to present, as a component of comprehensive income, the amountsfrom transactions and other events which currently are excluded from thestatement of income and are recorded directly to stockholders’ equity.

 

**RecentAccounting Pronouncements —**FASB statement No. 141 (R) “BusinessCombinations” was issued in December of 2007. This Statement establishesprinciples and requirements for how the acquirer of a business recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, and any noncontrolling interest in the acquiree. TheStatement also provides guidance for recognizing and measuring the goodwillacquired in the business combination and determines what information todisclose to enable users of the financial statements to evaluate the nature andfinancial effects of the business combination. The guidance will becomeeffective as of the beginning of a company’s fiscal year beginning after December 15,2008. This new pronouncement will impact the Company’s accounting for any businesscombinations completed after January 1, 2009.

 

 

 

 

59

----

 

FASB statement No. 160“Noncontrolling Interests in Consolidated Financial Statements—an amendment ofARB No. 51” was issued in December of 2007. This Statementestablishes accounting and reporting standards for the noncontrolling interestin a subsidiary and for the deconsolidation of a subsidiary. The guidance willbecome effective as of the beginning of a company’s fiscal year beginning afterDecember 15, 2008. The Company is currently evaluating the potentialimpact the new pronouncement will have on its consolidated financialstatements.

 

Staff AccountingBulletin No. 110 (SAB 110) amends and replaces Question 6 of Section D.2of Topic 14, “Share-Based Payment,” of the Staff Accounting Bulletin series.Question 6 of Section D.2 of Topic 14 expresses the views of the staffregarding the use of the “simplified” method in developing an estimate ofexpected term of “plain vanilla” share options and allows usage of the “simplified”method for share option grants prior to December 31, 2007. SAB 110 allowspublic companies which do not have historically sufficient experience toprovide a reasonable estimate to continue use of the “simplified” method forestimating the expected term of “plain vanilla” share option grants after December 31,2007.  SAB 110 is effective January 1,2008.

 

Staff AccountingBulletin No. 109 (SAB 109), “Written Loan Commitments Recorded at FairValue Through Earnings” expresses the views of the staff regarding written loancommitments that are accounted for at fair value through earnings undergenerally accepted accounting principles. To make the staff’s views consistentwith current authoritative accounting guidance, the SAB revises and rescindsportions of SAB No. 105, “Application of Accounting Principles to LoanCommitments.”  Specifically, the SAB revises the SEC staff’s views onincorporating expected net future cash flows related to loan servicingactivities in the fair value measurement of a written loan commitment. The SABretains the staff’s views on incorporating expected net future cash flowsrelated to internally-developed intangible assets in the fair value measurementof a written loan commitment. The staff expects registrants to apply the viewsin Question 1 of SAB 109 on a prospective basis to derivative loan commitmentsissued or modified in fiscal quarters beginning after December 15, 2007.The Company does not expect SAB 109 to have a material impact on its financialstatements.

 

In February 2007,the FASB issued FASB Staff Position (FSP) FAS 158-1, “ConformingAmendments to the Illustrations in FASB Statements No. 87, No. 88,and No 106 and to the Related Staff Implementation Guides.” This FSP makesconforming amendments to other FASB statements and staff implementation guidesand provides technical corrections to SFAS No. 158, “Employers’ Accountingfor Defined Benefit Pension and Other Postretirement Plans.” The conformingamendments in this FSP shall be applied upon adoption of SFAS No. 158. Theadoption of FSP FAS 158-1 did not have a material impact on the consolidatedfinancial statements or disclosures.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities— including an amendment of FASB Statements No. 115”SFAS No. 159 permits entities to choose to measure financial instrumentsand certain other items at fair value that are not currently required to bemeasured at fair value.   This Statementis effective as of the beginning of an entity’s first fiscal year beginningafter November 15, 2007.  Theadoption of this pronouncement of SFAS No. 159 did not have any effect onits consolidated financial position and results of operations.

 

In June 2007,the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 06-11,“Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards”(“EITF 06-11”). EITF 06-11 states that an entity should recognize arealized tax benefit associated with dividends on nonvested equity shares,nonvested equity share units and outstanding equity share options charged toretained earnings as an increase in additional paid in capital. The amountrecognized in additional paid in capital should be included in the pool ofexcess tax benefits available to absorb potential future tax deficiencies onshare-based payment awards. EITF 06-11 should be applied prospectively toincome tax benefits of dividends on equity-classified share-based paymentawards that are declared in fiscal years beginning after December 15,2007. The implementation of this standard did not have any effect on theCompany’s financial position or results of operations.

 

In May 2007,the FASB issued FASB Staff Position (“FSP”) FIN 48-1 “Definition of Settlementin FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides guidanceon how to determine whether a tax position is effectively settled for thepurpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 iseffective retroactively to January 1, 2007. The implementation of thisstandard did not have any impact the Company’s consolidated financial positionor results of operations.

 

In March 2007,the FASB ratified Emerging Issues Task Force Issue No. 06-10 “Accountingfor Collateral Assignment Split-Dollar Life Insurance Agreements” (EITF 06-10).EITF 06-10 provides guidance for determining a liability for the postretirementbenefit obligation as well as recognition and measurement of the associatedasset on the basis of the terms of the collateral assignment agreement. EITF06-10 is effective for fiscal years beginning after December 15, 2007. Theadoption of EITF 06-10 did not have any impact on its financial position,results of operations or cash flows.

 

On September 7,2006, the Task Force reached a conclusion on EITF Issue No. 06-5, “Accountingfor Purchases of Life Insurance — Determining the Amount That Could Be Realizedin Accordance with FASB Technical Bulletin No. 85-4, Accounting forPurchases of Life Insurance” (“EITF 06-5”). The scope of EITF 06-5 consists ofsix separate issues relating to accounting for life 

 

 

 

60

----

 

insurance policiespurchased by entities protecting against the loss of “key persons.” The sixissues are clarifications of previously issued guidance on FASB TechnicalBulletin No. 85-4. EITF 06-5 is effective for fiscal years beginning afterDecember 15, 2006. The adoption of this EIFT did not have any impact onthe Company’s consolidated financial statements.

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurement.” SFAS No. 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles, and expands disclosures about fairvalue measurements. This Statement does not require any new fair valuemeasurements. SFAS No. 157 is effective for fiscal years beginning after November 15,2007 and interim periods within those fiscal years. Management believes theadoption of SFAS No. 157 will not have a material effect on itsconsolidated financial position and results of operations.

 

In December 2007,the FASB issued proposed FASB Staff Position (FSP) 157-b, “Effective Date ofFASB Statement No. 157,” that would permit a one-year deferral in applyingthe measurement provisions of Statement No. 157 to non-financial assetsand non-financial liabilities (non-financial items) that are not recognized ordisclosed at fair value in an entity’s financial statements on a recurringbasis (at least annually). Therefore, if the change in fair value of anon-financial item is not required to be recognized or disclosed in thefinancial statements on an annual basis or more frequently, the effective dateof application of Statement 157 to that item is deferred until fiscal yearsbeginning after November 15, 2008 and interim periods within those fiscalyears. This deferral does not apply, however, to an entity that appliesStatement 157 in interim or annual financial statements before proposed FSP157-b is finalized. The Company is currently evaluating the impact, if any,that the adoption of FSP 157-b will have on the Company’s operating income ornet earnings.

 

The EITF reached aconsensus on EITF Issue No. 06-4, “The Accounting for DeferredCompensation and Postretirement Benefit Aspects of Endorsement Split-DollarLife Insurance Arrangements” (“EITF 06-4”). EITF 06-4 addresses whether thepostretirement benefit associated with an endorsement split-dollar lifeinsurance arrangement is effectively settled in accordance with Statement ofFinancial Accounting Standards No. 106, “Employers’ Accounting forPostretirement Benefits Other Than Pensions” and APB Opinion No. 12 “OmnibusOpinion—1967” upon entering into such an arrangement. EITF 06-4 is effectivefor fiscal years beginning after December 15, 2007. Management believesthe adoption of EITF Issue No. 06-4 will not have a material effect on itsconsolidated financial position and results of operations.

 

**3.     Investment Securities Available for Saleand Held to Maturity**

 

The amortizedcost, gross unrealized gains and losses, and the fair values of investmentsecurities available for sale and held to maturity are shown below.  Where applicable, the maturity distributionand the fair value of investment securities, by contractual maturity, areshown.  Actual maturities may differ fromcontractual maturities because issuers may have the right to call or prepayobligations with or without call or prepayment penalties.

 
| ** **                               | ** ** | **December 31,  2007** | ** **     |
|------------------------------------------|------------|-----------------------------|----------------|
|                                     |       | **Amortized**               |           | **Gross  Unrealized** |   | **Fair** |   |
| **Available for Sale**                   | ** ** | **Cost**                    | ** **     | **Gains** | ** ** | **Losses** | ** ** | **Value** |   |
|                                     |       |                        |           |   |   |   |   |   |   |
| Obligations of U.S. Government agencies: |       |                        |           |   |   |   |   |   |   |
| Due 1 year or  less                      |       | **$**                       | **999,688**    | ** ** | **—** | ** ** | **$** | **(978** | **)** | **$** | **998,710** | ** ** |
| Due after 1 year  through 5 years        |       | **12,995,537**              | ** **     | **$** | **72,872** | ** ** | **—** | ** ** | **13,068,409** | ** ** |
| Due after 5  years through 10 years      |       | **8,995,000**               | ** **     | **59,670** | ** ** | **(310** | **)** | **9,054,360** | ** ** |
| Due after 10  years                      |       | **3,343,803**               | ** **     | **6,305** | ** ** | **—** | ** ** | **3,350,108** | ** ** |
| Mutual funds                             | ** ** | **19,142,289**              | ** **     | **—** | ** ** | **—** | ** ** | **19,142,289** |   |
|                                     |       | ** **                  | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| Total                                    | ** ** | **$**                       | **45,476,317** | ** ** | **$** | **138,847** | ** ** | **$** | **(1,288** | **)** | **$** | **45,613,876** |   |

 

 
| ** **                          | ** ** | **December 31, 2007** | ** **     |
|-------------------------------------|------------|----------------------------|----------------|
|                                |       | **Amortized**              |           | **Gross  Unrealized** |   | **Fair** |   |
| **Held to Maturity**                | ** ** | **Cost**                   | ** **     | **Gains** | ** ** | **Losses** | ** ** | **Value** |   |
|                                |       |                       |           |   |   |   |   |   |   |
|                                |       |                       |           |   |   |   |   |   |   |
| Municipal Obligations:              |       | ** **                 | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| Due after 5  years through 10 years |       | **$**                      | **5,364,943**  | ** ** | **$** | **94,296** | ** ** | **—** | ** ** | **$** | **5,459,240** | ** ** |
| Due after 10  years                 |       | **16,882,328**             | ** **     | **528,252** | ** ** | **$** | **(43,105** | **)** | **17,367,475** |   |
|                                |       | ** **                 | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| Total                               | ** ** | **$**                      | **22,247,271** | ** ** | **$** | **622,548** | ** ** | **$** | **(43,105** | **)** | **$** | **22,826,715** |   |

 

 

 

61

----

 
| ** **                               | ** ** | **December 31, 2006** | ** ** |
|------------------------------------------|------------|----------------------------|------------|
|                                     |       | **Amortized**              | ** ** | **Gross  Unrealized** | ** ** | **Fair** |   |
| **Available for Sale**                   |       | **Cost**                   | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** |   |
|                                     |       |                       |       |   |   |   |   |   |   |
| Obligations of U.S. Government agencies: |       |                       |       |   |   |   |   |   |   |
| Due 1 year or  less                      |       | $                          | 2,000,000  |   | — |   | $ | (11,880 | ) | $ | 1,988,120 |   |
| Due after 1 year  through 5 years        |       | 12,989,613                 |       | $ | 7,642 |   | (113,105 | ) | 12,884,150 |   |
| Due after 5  years through 10 years      |       | 1,000,000                  |       | — |   | (14,060 | ) | 985,940 |   |
| Mutual funds                             |       | 20,001,827                 |       | — |   | (806,811 | ) | 19,195,016 |   |
|                                     |       |                       |       |   |   |   |   |   |   |
| Total                                    |       | $                          | 35,991,440 |   | $ | 7,642 |   | $ | (945,856 | ) | $ | 35,053,226 |   |

 

 
|                                |   | **December 31, 2006** |       |
|-------------------------------------|--------|----------------------------|------------|
|                                |   | **Amortized**              | ** ** | **Gross  Unrealized** | ** ** | **Fair** |   |
| **Held to Maturity**                |   | **Cost**                   | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** |   |
|                                |   |                       |       |   |   |   |   |   |   |
| Municipal Obligations:              |   |                       |       |   |   |   |   |   |   |
| Due after 1 year  through 5 years   |   | $                          | 340,377    |   | $ | 2,012 |   | — |   | $ | 342,389 |   |
| Due after 5  years through 10 years |   | 3,601,806                  |       | 54,320 |   | $ | (17,714 | ) | 3,638,412 |   |
| Due after 10  years                 |   | 20,308,776                 |       | 626,530 |   | (27,516 | ) | 20,907,790 |   |
|                                |   |                       |       |   |   |   |   |   |   |
| Total                               |   | $                          | 24,250,959 |   | $ | 682,862 |   | $ | (45,230 | ) | $ | 24,888,591 |   |

 

Included inobligations of U.S. Government agencies at December 31, 2007 and December 31,2006, were $16.4 and $11.9 million, respectively, of structured notes.   These structured notes were comprised ofstep-up bonds that provide the U.S. Government agency with the right, but notthe obligation, to call the bonds on certain dates.

 

For the yearsended December 31, 2007 and 2006, proceeds from sales of investmentsecurities available for sale amounted to $0 and $1.0 million, respectively.For such periods, gross realized gains on sales amounted to $0 and $2,000,respectively, while gross realized losses amounted to $0 and $0, respectively.The tax provision applicable to the net realized gain (loss) amounted to $0 and$1,000, for 2007 and 2006,  respectively.Investment securities with an aggregate carrying value of $8.0 million and $4.7million were pledged as collateral for certain deposits at December 31,2007 and 2006, respectively.

 

**4.     Mortgage-Backed Securities Available forSale**

 

The amortizedcost, gross unrealized gains and losses, and the fair values of mortgage-backedsecurities available for sale are as follows:

 
| ** **                      | ** ** | **December 31, 2007** | ** **     |
|---------------------------------|------------|----------------------------|----------------|
|                            |       | **Amortized**              | ** **     | **Gross  Unrealized** |   | **Fair** |   |
| ** **                      | ** ** | **Cost**                   | ** **     | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
|                            |       |                       |           |   |   |   |   |   |   |
| GNMA pass-through certificates  | ** ** | **$**                      | **3,669,183**  | ** ** | **$** | **48,210** | ** ** | **$** | **(17,734** | **)** | **$** | **3,699,659** | ** ** |
| FHLMC pass-through certificates | ** ** | **10,845,779**             | ** **     | **90,109** | ** ** | **(63,857** | **)** | **10,872,031** | ** ** |
| FNMA pass-through certificates  | ** ** | **21,082,155**             | ** **     | **128,333** | ** ** | **(150,355** | **)** | **21,060,133** | ** ** |
|                            |       | ** **                 | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| Total                           | ** ** | **$**                      | **35,597,117** | ** ** | **$** | **266,652** | ** ** | **$** | **(231,946** | **)** | **$** | **35,631,823** | ** ** |

 

 

 

62

----

 

 
| ** **                      | ** ** | **December 31, 2006** | ** ** |
|---------------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **Amortized**              | ** ** | **Gross Unrealized** | ** ** | **Fair** | ** ** |
|                            |       | **Cost**                   | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** |   |
|                            |       |                       |       |   |   |   |   |   |   |
| GNMA pass-through certificates  |       | $                          | 4,461,810  |   | $ | 24,822 |   | $ | (85,938 | ) | $ | 4,400,694 |   |
| FHLMC pass-through certificates |       | 13,422,268                 |       | 14,517 |   | (246,586 | ) | 13,190,199 |   |
| FNMA pass-through certificates  |       | 26,672,093                 |       | 4,788 |   | (632,068 | ) | 26,044,813 |   |
|                            |       |                       |       |   |   |   |   |   |   |
| Total                           |       | $                          | 44,556,171 |   | $ | 44,127 |   | $ | (964,592 | ) | $ | 43,635,706 |   |

 

The collateralizedmortgage obligations contain both fixed and adjustable classes of securitieswhich are repaid in accordance with a predetermined priority period.  The underlying collateral of the securitiesare loans which are insured by FHLMC and FNMA.

 

At December 31,2007 and 2006, the Bank had $2.5 million and $2.9 million, respectively, inmortgage-backed securities pledged as collateral for the treasury, tax and loanaccount and certain deposits.

 

**5.     Loans Receivable — Net**

 

Loans receivableconsist of the following:

 
| ** **                 | ** ** | **December 31,** | ** **      |
|----------------------------|------------|-----------------------|-----------------|
| ** **                 | ** ** | **2007**              | ** **      | **2006** | ** ** |
| Real estate loans:         |       |                  |            |   |   |
| Single-family              | ** ** | **$**                 | **111,498,538** |   | $ | 108,425,691 |   |
| Multi-family               | ** ** | **1,672,707**         |            | 2,088,053 |   |
| Commercial                 | ** ** | **122,702,922**       |            | 108,338,566 |   |
| Land and construction      | ** ** | **14,591,548**        |            | 11,773,746 |   |
| Commercial business        | ** ** | **6,924,380**         |            | 5,484,638 |   |
| Consumer and other loans   | ** ** | **2,367,387**         |            | 2,443,917 |   |
| Total loans  receivable    | ** ** | **259,757,482**       |            | 238,554,611 |   |
|                       |       |                  |            |   |   |
| Deferred costs  (fees)     | ** ** | **5,748**             |            | (74,160 | ) |
| Allowance for  loan losses | ** ** | **(2,831,065**        | **)**           | (2,719,418 | ) |
| Loans receivable - net     | ** ** | **$**                 | **256,932,165** |   | $ | 235,761,033 |   |

 

The Bankoriginates loans to customers located primarily in Southeastern Pennsylvania.This geographic concentration of credit exposes the Bank to a higher degree ofrisk associated with this economic region. In addition, the Bank participatesin the origination and sale of fixed-rate single-family residential mortgageloans in the secondary market. The Bank recognized gain from the sale of suchloans of $30,090 and $14,529, for the years ended December 31, 2007 and2006, respectively.

 

At December 31,2007 and 2006, the Bank was servicing loans for others amounting toapproximately $1.1 million and $567,000, respectively. Servicing loans forothers generally consists of collecting mortgage payments, maintaining escrowaccounts, disbursing payments to investors and foreclosure processing. Loanservicing income is recorded upon receipt and includes servicing fees frominvestors and certain charges collected from borrowers, such as late paymentfees.

 

The Bankoriginates and purchases both adjustable and fixed rate loans.  The adjustable rate loans have interest rateadjustment limitations and are generally indexed to the National Median MonthlyCost of Funds or U.S. Treasury securities plus a fixed margin.

 

 

63

----

 

Following is asummary of changes in the allowance for loan losses:

 
| ** **                      | ** ** | **Year  Ended**

** December 31,** | ** **    |
|---------------------------------|------------|----------------------------------------------|---------------|
| ** **                      | ** ** |                                         |
| ** **                      | ** ** | **2007**                                     | ** **    | **2006** | ** ** |
|                            |       |                                         |          |   |   |
| Balance, beginning of year      | ** ** | **$**                                        | **2,719,418** |   | $ | 2,670,494 |   |
| Provision charged to operations | ** ** | **120,000**                                  |          | 60,000 |   |
| Charge-offs                     | ** ** | **(13,668**                                  | **)**         | (13,644 | ) |
| Recoveries                      | ** ** | **5,315**                                    |          | 2,568 |   |
|                            |       |                                         |          |   |   |
| Balance, end of year            | ** ** | **$**                                        | **2,831,065** |   | $ | 2,719,418 |   |

 

Nonperformingloans amounted to $2.1 million and $1.6 million at December 31, 2007 and2006, respectively.  Interest income thatwould have been recorded during 2007 and 2006, if the Bank’s nonperformingloans at the end of the year had been performing in accordance with their termswas $67,000 and $66,000, respectively. The amount of interest income that was actually recorded during 2007 and2006 with respect to such nonperforming loans amounted to approximately $47,000and $1,000, respectively.

 

At December 31,2007 and 2006, 100% of impaired loan balances were measured for impairmentbased on the fair value of the loans’ collateral.

 
| ** **                                    | ** ** | **December 31,** | ** **  |
|-----------------------------------------------|------------|-----------------------|-------------|
| ** **                                    | ** ** | **2007**              |        | 2006 |   |
|                                          |       |                  |        |   |   |
| Impaired loans without a valuation allowance  | ** ** | **$**                 | **—**  | ** ** | **$** | **—** | ** ** |
|                                          |       |                  |        |   |   |
| Impaired loans with a valuation allowance     | ** ** | **$**                 | **415,989** | ** ** | **$** | **—** | ** ** |
|                                          |       |                  |        |   |   |
| Total impaired loans                          | ** ** | **$**                 | **415,989** | ** ** | **$** | **—** | ** ** |
|                                          |       |                  |        |   |   |
| Valuation allowance related to impaired loans | ** ** | **$**                 | **41,599**  | ** ** | **$** | **—** | ** ** |

 

 
| ** **                                   | ** ** | **Year  Ended**

**December 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|
|                                         | ** ** |                                   |
|                                         | ** ** | **2007**                               |       | 2006 |   |
|                                         |       |                                   |       |   |   |
| Average impaired loans                       | ** ** | **$**                                  | **34,666** |   | $ | 188,191 |   |
| Interest income recognized on impaired loans | ** ** | **28,289**                             |       | 5,391 |   |
| Interest income recognized on a cash         |       |                                   |       |   |   |
| basis on  impaired loans                     |       | **28,289**                             | ** ** | 5,391 |   |
|                                              |            |                                        |            |  |  |  |  |

 

 

 

64

----

 

**6.     Premises and Equipment**

 

Premises andequipment are summarized by major classifications as follows:

 
| ** **               | ** **   | **Year  Ended**

**December 31,** | ** **    |
|--------------------------|--------------|----------------------------------------|---------------|
|                     | *** *** |                                   |
|                     | ** **   | **2007**                               |          | 2006 |   |
|                     |         |                                   |          |   |   |
| Land and buildings       | ** **   | **$**                                  | **3,887,863** |   | $ | 3,722,218 |   |
| Furniture and fixtures   | ** **   | **5,278,330**                          |          | 5,319,444 |   |
|                     |         |                                   |          |   |   |
| Total                    | ** **   | **9,166,193**                          |          | 9,041,662 |   |
| Accumulated depreciation | ** **   | **(6,256,071**                         | **)**         | (5,898,422 | ) |
|                     |         |                                   |          |   |   |
| Net                      | ** **   | **$**                                  | **2,910,122** |   | $ | 3,143,240 |   |

 

Depreciationexpense for the years ended December 31, 2007 and 2006 amounted to$655,000 and $646,000, respectively.

 

**7.     Deposits**

 

Deposits consistof the following major classifications:

 
| ** **                              | ** ** | **December 31,** | ** **      |
|-----------------------------------------|------------|-----------------------|-----------------|
| ** **                              | ** ** | **2007**              | ** **      | **2006** | ** ** |
| ** **                              | ** ** | **Amount**            | ** **      | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
|                                    |       |                  |            |   |   |   |   |   |   |
| Money market deposit accounts           | ** ** | **$**                 | **25,104,809**  | ** ** | **7.6** | **%** | $ | 24,254,727 |   | 7.3 | % |
| Passbook and statement savings accounts | ** ** | **38,212,311**        | ** **      | **11.6** |   | 43,511,509 |   | 13.0 |   |
| Certificates of less than $100,000      | ** ** | **165,511,070**       | ** **      | **49.9** |   | 165,607,301 |   | 49.6 |   |
| Certificates of $100,000 or more        | ** ** | **36,348,621**        | ** **      | **11.0** |   | 34,620,648 |   | 10.4 |   |
| NOW accounts                            | ** ** | **48,770,873**        | ** **      | **12.8** |   | 43,859,691 |   | 13.1 |   |
| Non-interest bearing accounts           | ** ** | **16,839,970**        | ** **      | **7.1** |   | 21,948,062 |   | 6.6 |   |
|                                    |       |                  |            |   |   |   |   |   |   |
| Total                                   | ** ** | **$**                 | **330,787,654** | ** ** | **100.0** | **%** | $ | 333,801,938 |   | 100.0 | % |

 

The weightedaverage cost of deposits was 3.45% and 3.37 % at December 31, 2007, and2006, respectively.

 

 

A summary ofcertificates by scheduled maturity was as follows:

 

 
| ** ** | ** ** | **December 31,  2007** | ** **  |
|------------|------------|-----------------------------|-------------|
| ** ** | ** ** | **Amount**                  | ** **  | **Percent** | ** ** |
|       |       |                        |        |   |   |
| 2008       |       | $                           | 181,843,135 |   | 90.1 | % |
| 2009       |       | 8,169,965                   |        | 4.0 | % |
| 2010       |       | 5,480,027                   |        | 2.7 | % |
| 2011       |       | 5,688,061                   |        | 2.8 | % |
| 2012       |       | 483,733                     |        | 0.3 | % |
| Thereafter |       | 194,770                     |        | 0.1 | % |
| Total      |       | $                           | 201,859,691 |   | 100.0 | % |

 

 

 

65

----

 

A summary ofinterest expense on deposits was as follows:

 
| ** **                         | ** ** | **Year Ended December 31,** | ** **     |
|------------------------------------|------------|----------------------------------|----------------|
| ** **                         | ** ** | **2007**                         | ** **     | **2006** | ** ** |
|                               |       |                             |           |   |   |
| Money market deposit accounts      | ** ** | **$**                            | **652,442**    |   | $ | 386,516 |   |
| Other savings deposits             | ** ** | **305,373**                      |           | 366,626 |   |
| Certificates of less than $100,000 | ** ** | **8,018,650**                    |           | 5,817,646 |   |
| Certificates of $100,000 or more   | ** ** | **1,414,943**                    |           | 949,366 |   |
| NOW accounts                       | ** ** | **1,226,750**                    |           | 829,879 |   |
| Total                              | ** ** | **$**                            | **11,618,158** |   | $ | 8,350,033 |   |
|                               |       |                             |           |   |   |

**8.     FHLB Advances**

 

FHLB Advances weresummarized as follows:

 
| ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** **            | ** **        | ** ** | ** ** |
|--------------------------|------------|------------|------------|------------|------------|-----------------------|-------------------|------------|------------|
| ** **               | ** ** | ** ** | ** ** | Interest   | ** ** | **December 31,** | ** **        |
|                     |       | Due        |       | Rate       | ** ** | **2007**              |              | 2006       |       |
|                     |       |       |       |       |       |                  |              |       |       |
| FHLB advance             |       | 12/01/07   |       | 6.00       | %          | **$**                 | **–0–** |       | $          | 171,822 |   |
| FHLB convertible advance |       | 07/22/09   |       | 6.19       | ** ** | **5,000,000**         |              | 5,000,000  |       |
| FHLB convertible advance |       | 02/03/10   |       | 6.05       | ** ** | **6,000,000**         |              | 6,000,000  |       |
| FHLB convertible advance |       | 05/17/10   |       | 6.44       | ** ** | **11,000,000**        |              | 11,000,000 |       |
| FHLB convertible advance |       | 06/28/10   |       | 6.44       | ** ** | **10,000,000**        |              | 10,000,000 |       |
| FHLB convertible advance |       | 09/22/10   |       | 6.10       | ** ** | **5,000,000**         |              | 5,000,000  |       |
| Total                    | ** ** | ** ** |       |       |       | **$**                 | **37,000,000**    |       | $          | 37,171,822 |   |

 

The FHLB has anoption, beginning at a predetermined date and quarterly thereafter, to convertcertain advances to a floating rate advance, generally at three-month LIBOR.However, the Bank may, at its option and without any penalty, put back theadvance or a portion thereof to the FHLB prior to conversion.

 

The FHLB offers analternative to regular repurchase agreements. The term is variable from overnight to one year and utilizes mortgageloans as collateral in lieu of liquidity items such as government securitiesfor collateral.

 

The Bank’s unusedcredit line with the FHLB amounted to approximately $20,000,000 at both December 31,2007 and 2006, respectively.  Theweighted average rate on FHLB advances was 6.30% and 6.30% at December 31,2007 and 2006, respectively.  Theadvances are collateralized by FHLB stock owned by the Bank in addition to ablanket pledge of eligible assets in an amount required to be maintained sothat the estimated fair value of such eligible assets exceeds, at all times,110% of the outstanding advances.

 

 

 

66

----

 

The followingtable sets forth certain information regarding borrowed funds at or for thedates indicated:

 
| ** **                                                   | ** ** | **At or  for the Year Ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------|------------|
|                                                         |       | **2007**                                        | ** ** | **2006** |   |
|                                                         |       | **(Dollars  in Thousands)**                     |       |
| FHLB of Pittsburgh advances:                                 |       |                                            |       |   |   |
| Average balance  outstanding                                 | ** ** | **$**                                           | **37,153** |   | $ | 47,684 |   |
| Maximum amount  outstanding at any month-end during the year | ** ** | **37,170**                                      |       | 52,182 |   |
| Balance  outstanding at end of year                          | ** ** | **37,000**                                      |       | 37,173 |   |
| Weighted average  interest rate during the year              | ** ** | **6.37**                                        | **%**      | 6.21 | % |
| Weighted average  interest rate at end of period             | ** ** | **6.30**                                        | **%**      | 6.30 | % |
|                                                         |       |                                            |       |   |   |
| Total borrowings:                                            |       |                                            |       |   |   |
| Average balance  outstanding                                 | ** ** | **$**                                           | **37,356** |   | $ | 47,990 |   |
| Maximum amount  outstanding at any month-end during the year | ** ** | **38,975**                                      |       | 52,474 |   |
| Balance  outstanding at end of year                          | ** ** | **37,042**                                      |       | 37,210 |   |
| Weighted average  interest rate during the year              | ** ** | **6.37**                                        | **%**      | 6.21 | % |
| Weighted average  interest rate at end of year               | ** ** | **6.34**                                        | **%**      | 6.29 | % |

 

**9.     Income Taxes**

 

The Bank uses theexperience method in computing reserves for bad debts. The bad debt deductionallowable under this method is available to small banks with assets less than$500 million. Generally, this method allows the Bank to deduct an annualaddition to the reserve for bad debts equal to the increase in the balance ofthe Bank’s reserve for bad debts at the end of the year to an amount equal tothe percentage of total loans at the end of the year, computed using the ratioof the previous six years’ net chargeoffs divided by the sum of the previoussix years’ total outstanding loans at year end.

 

Retained earningsat both December 31, 2007 and 2006 included approximately $7.1 million,representing bad debt deductions, for which no deferred income taxes have beenprovided.

 

On January 1,2007, the Company adopted FIN 48, “Accounting for Uncertainty in Income Taxes —an interpretation of SFAS No. 109” (“FIN 48”). FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with SFAS No. 109, “Accounting for IncomeTaxes”. The implementation of this standard did not have any effect on theCompany’s financial position or results of operations.

 

From time to time,the Company may be subject to examination by various tax authorities injurisdictions in which the Company has its business operations. The Companyregularly assesses the likelihood of additional assessments in each of the taxjurisdictions resulting from these examinations. Tax reserves have beenestablished, which the Company believes to be adequate in relation to thepotential for additional assessments. Once established, reserves are adjustedas information becomes available or when an event requiring a change to thereserve occurs. The resolution of tax matters could have an impact on theCompany’s effective tax rate.  As of December 31,2007, the Company has not been audited by the Internal Revenue Service duringthe past five years.

 

 

 

67

----

 

The tax effect oftemporary differences that give rise to significant portions of the deferredtax accounts, calculated at 34%, is as follows:

 

| ** **                                                   | ** ** | **December 31,** | ** **    |
|--------------------------------------------------------------|------------|-----------------------|---------------|
|                                                         | ** ** | **2007**              |          | **2006** |   |
|                                                         |       |                  |          |   |   |
| Deferred tax assets:                                         |       |                  |          |   |   |
| Depreciation and  amortization                               | ** ** | **$**                 | **22,440**    |   | — |   |
| Allowance for  loan losses                                   | ** ** | **962,540**           |          | $ | 924,460 |   |
| Additional  minimum liability for retirement plans           | ** ** | **463,875**           |          | 743,602 |   |
| Net unrealized  (gain) loss on securities available for sale | ** ** | **(58,570**           | **)**         | 631,951 |   |
| Securities  impairment                                       | ** ** | **292,243**           | ** **    | **—** | ** ** |
| Supplemental  retirement benefits                            | ** ** | **1,033,940**         |          | 906,100 |   |
| Alternative  minimum tax                                     | ** ** | **1,101,000**         |          | 888,000 |   |
| State tax loss  carryfowards                                 | ** ** | **252,885**           |          | 181,355 |   |
| Total deferred  tax assets                                   | ** ** | **4,070,353**         |          | 4,275,468 |   |
|                                                         |       |                  |          |   |   |
| Deferred tax liabilities:                                    |       |                  |          |   |   |
| Depreciation and  amortization                               |       | —                |          | (65,620 | ) |
| Deferred loan  fees                                          | ** ** | **(104,720**          | **)**         | (98,260 | ) |
| Other                                                        | ** ** | **(124,065**          | **)**         | (50,680 | ) |
| Total deferred  tax liabilities                              | ** ** | **(228,785**          | **)**         | (214,560 | ) |
| Valuation  allowance                                         | ** ** | **(252,885**          | **)**         | (181,355 | ) |
|                                                         |       |                  |          |   |   |
| Total                                                        |       | **$**                 | **3,588,683** |   | $ | 3,879,553 |   |

 

As of December 31,2007, the Bank had approximately $2.2 million of State NOL carryforwardsexpiring through 2010.  The Company hasrecorded a full valuation allowance for these carryforwards as projected Stateincome at the Bank is not anticipated to be sufficient to realize thesebenefits.

 

The consolidatedbenefit for income taxes consisted of the following for the years ended December 31:

 

| ** ** | ** ** | **2007**     | ** **   | **2006** | ** ** |
|------------|------------|--------------|--------------|----------|------------|
|       |       |         |         |     |       |
| Current    | ** ** | **$**        | **522,135**  |     | $          | 304,000 |   |
| Deferred   | ** ** | **(679,378** | **)**        | (371,000 | )          |
|       |       |         |         |     |       |
| Total      | ** ** | **$**        | **(157,243** | **)**    | $          | (67,000 | ) |

 

The Bank’s federalincome tax benefit differs from that computed at the statutory tax rate asfollows:

 
| ** **                        | ** ** | **Year  Ended December 31,** | ** **   |
|-----------------------------------|------------|-----------------------------------|--------------|
|                              |       | **2007**                          |         | **2006** |   |
| ** **                        | ** ** | ** **                        | ** **   | **Percentage** |   |   |   | **Percentage** |   |
|                              |       | ** **                        |         | **of  Pretax** |   |   |   | **of  Pretax** |   |
| ** **                        | ** ** | **Amount**                        | ** **   | **Income** | ** ** | **Amount** | ** ** | **Income** |   |
|                              |       |                              |         |   |   |   |   |   |   |
| Expense at statutory rate         | ** ** | **$**                             | **305,218**  | ** ** | **34.0** | **%** | $ | 443,246 |   | 34.0 | % |
| Adjustments resulting from:       |       |                              |         |   |   |   |   |   |   |
| Tax-exempt  income                | ** ** | **(347,400**                      | **)**        | **(38.7** | **)** | (415,766 | ) | (31.9 | ) |
| Increase in cash  surrender value |       |                              |         |   |   |   |   |   |   |
| of life  insurance                |       | **(122,545**                      | **)**        | **(13.7** | **)** | (123,518 | ) | (9.5 | ) |
| Other                             | ** ** | **7,484**                         | ** **   | **0.9** |   | 29,038 |   | 2.2 |   |
| Income tax  benefit per           |       |                              |         |   |   |   |   |   |   |
| consolidated  statements          |       |                              |         |   |   |   |   |   |   |
| of income                         |       | **$**                             | **(157,243** | **)** | **(17.5** | **)%** | $ | (67,000 | ) | (5.2 | )% |

 

 

 

68

----

 

**10.  Commitments and Contingencies**

 

The Bank hadapproximately $15.0 million and $11.2 million in outstanding loan commitments,excluding unused lines of credit and the undisbursed portion of loans inprocess, at December 31, 2007 and 2006, respectively, which were expectedto fund within the next three months.  Inaddition, the Bank had $569,000 and $296,000 in standby letters of credit at December 31,2007 and 2006, respectively, which were secured by cash, marketable securitiesand real estate.  All commitments areissued using the Bank’s current loan policies and underwriting guidelines andthe breakdown between fixed-rate and adjustable-rate loans is as follows:

 

| ** **                               | ** ** | **December 31,** | ** **     |
|------------------------------------------|------------|-----------------------|----------------|
|                                     | ** ** | **2007**              |           | **2006** |   |
|                                     |       |                  |           |   |   |
| Fixed-rate (ranging from 5.75% to 7.50%) |       | **$**                 | **803,275**    |   | $ | 1,314,000 |   |
| Adjustable-rate                          |       | **14,203,545**        |           | 9,929,600 |   |
|                                     |       |                  |           |   |   |
| Total                                    |       | **$**                 | **15,006,820** |   | $ | 11,243,600 |   |

 

Depending on cashflow, interest rate risk, risk management and other considerations, longer termfixed-rate residential loans are sold in the secondary market.  There were no outstanding commitments to sellloans at December 31, 2007.

 

The Bank isinvolved in legal proceedings and litigation arising in the ordinary course ofbusiness. One such matter involves a number of related issues arising from alending relationship with a certain borrower. In March 2004, the borrower filed a Complaint alleging that acertain deed in lieu of foreclosure held in escrow had been wrongfullyrecorded.  In the opinion of management,the outcome of such proceedings and litigation currently pending will notmaterially affect the Bank’s consolidated financial statements.  However, there can be no assurance that anyof the outstanding legal proceedings and litigation to which the Bank is aparty will not be decided adversely to the Bank’s interests and have a materialadverse effect on the consolidated financial statements.

 

Expenses relatedto premises and equipment for 2007 and 2006 were $1.9 million and $1.9 million,respectively.  The Bank maintains officesat nine locations, including seven bank offices which it rents under leasesexpiring over the next 16 years.  Thefollowing is a summary of future minimum rental payments required under alloperating leases as of December 31, 2007:

 

 

| *** ***                  | ** ** | **Year Ending December 31,** | ** ** |
|-------------------------------|------------|-----------------------------------|------------|
|                          |       |                              |       |
| 2008                          |       | $                                 | 433,465    |   |
| 2009                          |       | 364,191                           |       |
| 2010                          |       | 298,591                           |       |
| 2011                          |       | 256,379                           |       |
| 2012                          |       | 201,125                           |       |
| Thereafter                    |       | 1,181,500                         |       |
| Total minimum rental payments |       | $                                 | 2,735,251  |   |

 

**11.  Retirement Plans**

 

The Bank has a definedbenefit pension plan, a profit-sharing plan and a defined contribution planunder Section 401(k) of the Internal Revenue Code, all of which coverall full-time employees meeting certain eligibility requirements.  The plans may be terminated at any time at thediscretion of the Bank’s Board of Directors.

 

Pension expense was$276,504 and $599,397, in 2007 and 2006, respectively.  The contribution for the profit-sharing planwas $108,000 and 100,000, in 2007 and 2006, respectively.  There were no employer contributions to the401(k) plan in 2007 and 2006.

 

The Bank has adopted theprovisions of SFAS 158 related to recognition of the funded status of definedbenefit plans as of 

 

 

 

69

----

 

December 31,2006.  The following table discloses theeffect on the Consolidated Statements of Financial Condition of adopting suchprovisions of SFAS 158:

 
| ** **                             | ** ** | **Before**       | ** ** | ** **     | ** ** | **After**        | ** ** |
|----------------------------------------|------------|------------------|------------|----------------|------------|------------------|------------|
| ** **                             | ** ** | **Adoption  of** | ** ** | ** **     | ** ** | **Adoption  of** | ** ** |
| ** **                             | ** ** | **SFAS 158**     | ** ** | **Adjustment** | ** ** | **SFAS 158**     | ** ** |
| ** **                             | ** ** | ** **       | ** ** | ** **     | ** ** | ** **       | ** ** |
| Deferred tax asset                     |       | $                | 3,358,553  |           | $          | 521,000          |       | $ | 3,879,553 |   |
| Prepaid expenses and other assets      |       | 1,968,468        |       | (332,719       | )          | 1,635,749        |       |
| Total assets                           |       | 410,161,537      |       | 188,281        |       | 410,349,818      |       |
| Accrued expenses and other liabilities |       | 4,638,425        |       | 1,199,634      |       | 5,838,059        |       |
| Accumulated other comprehensive loss   |       | (1,658,836       | )          | (1,011,353     | )          | (2,670,189       | )          |
| Total stockholders’ equity        |       | 34,511,319       |       | (1,011,353     | )          | 33,499,966       |       |
|                                        |            |                  |            |                |            |                  |            |  |  |  |

 

The net pension costs forthe years ended December 31, 2007 and 2006 included the followingcomponents:

 
| ** **                                     | ** ** | **2007**     | ** **  | **2006**   | ** ** |
|------------------------------------------------|------------|--------------|-------------|------------|------------|
| **Net Periodic Benefit Cost**                  | ** ** | ** **   | ** **  | ** ** | ** ** |
| Service Cost                                   | ** ** | **$**        | **308,684** |       | $          | 321,698 |   |
| Interest Cost                                  | ** ** | **234,907**  |        | 262,712    |       |
| Expected Return  on Plan Assets                | ** ** | **(302,401** | **)**       | (299,447   | )          |
| Amortization of  Transition Obligation/(Asset) | ** ** | **1,754**    |        | 3,496      |       |
| Amortization of  Prior Service Cost            | ** ** | **12,685**   |        | 12,685     |       |
| Amortization of  (Gain)/Loss                   | ** ** | **20,875**   |        | 60,353     |       |
| Net Periodic  Benefit Cost (NPBC)              | ** ** | **276,504**  |        | 361,497    |       |
| SFAS 88  Settlement                            | ** ** | **—**   |        | 237,900    |       |
| Net Periodic  Benefit Cost                     | ** ** | **$**        | **276,504** |       | $          | 599,397 |   |
|                                           |       |         |        |       |       |
| **Key Assumptions**                            | ** ** | ** **   | ** **  | ** ** | ** ** |
| Discount Rate  for Net Periodic Benefit Cost   | ** ** | **5.75**     | **%**       | 5.75       | %          |
| Salary Scale for  Net Periodic Benefit Cost    | ** ** | **4.00**     | **%**       | 4.00       | %          |
| Expected Return  on Plan Assets                | ** ** | **8.00**     | **%**       | 8.00       | %          |
|                                           |       |         |        |       |       |
| Discount Rate  for Plan Obligations            | ** ** | **6.00**     | **%**       | 5.75       | %          |
| Salary Scale for  Plan Obligations             | ** ** | **4.00**     | **%**       | 4.00       | %          |

 

A summary of reconciliation and disclosure information required underFAS 158 for the defined benefit pension plan is as follows:

 
| ** **                                         | ** ** | **2007**     | ** **    | **2006**   | ** ** |
|----------------------------------------------------|------------|--------------|---------------|------------|------------|
| **Change in Projected Benefit Obligation**         | ** ** | ** **   | ** **    | ** ** | ** ** |
| Projected  Benefit Obligation at Beginning of Year | ** ** | **$**        | **4,334,794** |       | $          | 4,788,582 |   |
| Service Cost                                       | ** ** | **308,684**  |          | 321,698    |       |
| Interest Cost                                      | ** ** | **234,907**  |          | 262,712    |       |
| SFAS 88  Settlements                               | ** ** | **—-**  |          | (800,220   | )          |
| Disbursements                                      | ** ** | **(122,382** | **)**         | (60,144    | )          |
| Actuarial  (Gain)/Loss                             | ** ** | **(401,836** | **)**         | (177,834   | )          |
| Projected  Benefit Obligation at End of Year       | ** ** | **$**        | **4,354,167** |       | $          | 4,334,794 |   |

 

 

 

70

----

 

 

 
| **Change in Plan Assets During Year**                                                              | ** ** | ** **    | ** **     | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------|----------------|------------|------------|
| Fair Value of  Plan Assets at Beginning of Year                                                    | ** ** | **$**         | **3,600,464**  |       | $          | 3,251,601 |   |
| Return on Plan  Assets                                                                             | ** ** | **305,291**   |           | 430,087    |       |
| Contributions  paid by Employer                                                                    | ** ** | **400,000**   |           | 800,000    |       |
| Settlements                                                                                        | ** ** | **—**    |           | (821,080   | )          |
| Benefits Paid                                                                                      | ** ** | **(122,382**  | **)**          | (60,144    | )          |
| Fair Value of  Plan Assets at End of Year                                                          | ** ** | **$**         | **4,183,373**  |       | $          | 3,600,464 |   |
|                                                                                               | ** ** | ** **    |           |       |       |
| **Benefit obligations at end of year**                                                             | ** ** | ** **    | ** **     | ** ** | ** ** |
| Accumulated  Benefit Obligation (ABO)                                                              | ** ** | **$**         | **3,281,096**  |       | $          | 3,087,187 |   |
| Projected  Benefit Obligation (PBO)                                                                | ** ** | **4,354,167** |           | 4,334,794  |       |
|                                                                                               | ** ** | ** **    |           |       |       |
| **Funded status**                                                                                  | ** ** | ** **    | ** **     | ** ** | ** ** |
| Projected  Benefit Obligation (PBO)                                                                | ** ** | **$**         | **(4,354,167** | **)**      | $          | (4,334,794 | ) |
| Fair Value of  Plan Assets                                                                         | ** ** | **4,183,373** |           | 3,600,464  |       |
| Funded Status at  End of Year                                                                      | ** ** | **$**         | **(170,794**   | **)**      | $          | (734,330 | ) |
|                                                                                               | ** ** | ** **    | ** **     |       |       |
| **Amounts recognized in the statement of financial  position**                                     | ** ** | ** **    | ** **     | ** ** | ** ** |
| Other  liabilities                                                                                 | ** ** | **$**         | **(170,794**   | **)**      | $          | (734,330 | ) |
|                                                                                               | ** ** | ** **    | ** **     |       |       |
| **Amounts recognized in accumulated other  comprehensive loss**                                    | ** ** | ** **    | ** **     | ** ** | ** ** |
| Net loss                                                                                           | ** ** | **$**         | **487,472**    |       | $          | 913,073 |   |
| Prior service  cost                                                                                | ** ** | **139,537**   |           | 152,222    |       |
| Transition  obligation                                                                             | ** ** | **—**    |           | 1,754      |       |
| Total                                                                                              | ** ** | **$**         | **627,009**    |       | $          | 1,067,049 |   |
|                                                                                               | ** ** | ** **    |           |       |       |
| **Other changes in plan assets and benefit  obligations recognized in other comprehensive income** | ** ** |
| Net loss/(gain)                                                                                    | ** ** | **$**         | **(404,726**   | **)**      | $          | (525,514 | ) |
| Amortization of  net loss                                                                          | ** ** | **(20,875**   | **)**          | (60,353    | )          |
| Amortization of  prior service cost                                                                | ** ** | **(12,685**   | **)**          | (12,685    | )          |
| Amortization of  transition obligation                                                             | ** ** | **(1,754**    | **)**          | (3,496     | )          |
| Total recognized  in other comprehensive loss                                                      | ** ** | **$**         | **(440,040**   | **)**      | $          | (602,048 | ) |
| Total recognized  in net periodic benefit cost and other comprehensive loss                        |       | **$**         | **(163,536**   | **)**      | $          | (2,651 | ) |

 

The estimated net loss and prior service cost for the defined benefitpension plan that will be amortized from accumulated other comprehensive lossinto net periodic benefit cost over the next fiscal year are $4,060, and$12,685, respectively.

 
| **Expected Contributions to the Trust** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|

 

** **

The Bank plans to contribute $300,000 to the Pension Plan in 2008.

 

 
| **Expected Benefit Payments From the Trust** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|

 

** **

| 2008      |   | $       | 92,973 |   |
|-----------|--------|---------|--------|--------|
| 2009      |   | 92,078  |   |
| 2010      |   | 91,104  |   |
| 2011      |   | 94,848  |   |
| 2012      |   | 117,139 |   |
| 2013-2017 |   | 917,411 |   |

 

 

 

71

----

 

Asset allocation for the pension plan includes equity securitiesranging from 55% to 75%, debt securities ranging from 25% to 45% and cash andcash equivalents ranging from 0% to 10%. The following table shows the asset allocation as of December 31,2007.

 

| **Investment Class**                    |   |   |      | **Percentage****of Assets** |   |
|-----------------------------------------|--------|--------|-----------|-----------------------------|--------|
|                                    |   |   |      |                        |   |
| Fixed Income*                           |   | $      | 4,183,373 |                        | 100.0  | % |
| Equity Investments                      |   | — |      | 0.0                         | %      |
| Other                                   |   | — |      | 0.0                         | %      |
|                                    |   |   |      |                        |   |
| Fair Value as of December 31, 2007 |   | $      | 4,183,373 |                        | 100.0  | % |
|                                         |        |        |           |                             |        |  |  |

----

* Assets were transferred to a new trustee as of December 31, 2007and were held entirely in fixed income temporarily.

 

In July 2000, the Bank entered into a Nonqualified Retirement andDeath Benefit Agreement (the “Agreement”) with certain officers of the Bank.  The purpose of the Agreement is to providethe officers with supplemental retirement benefits equal to a specifiedpercentage of final composition and a pre-retirement death benefit if theofficer does not attain the specific age requirement.   A summary of the reconciliation anddisclosure information required under SFAS No. 158 for the Agreement is asfollows:

** **
| ** **                                      | ** ** | **December 31,** | ** **    |
|-------------------------------------------------|------------|-----------------------|---------------|
| ** **                                      | ** ** | **2007**              | ** **    | **2006** | ** ** |
| **Change in benefit obligation during year**    | ** ** | ** **            | ** **    | ** ** | ** ** |
| ** **                                      | ** ** | ** **            | ** **    | ** ** | ** ** |
| Benefit obligation at beginning of year         | ** ** | **$**                 | **3,784,500** |   | $ | 3,694,147 |   |
| Service cost                                    | ** ** | **34,413**            |          | 32,543 |   |
| Interest cost                                   | ** ** | **213,043**           |          | 207,808 |   |
| Benefit payments                                | ** ** | **(158,532**          | **)**         | (152,128 | ) |
| Actuarial (gain)  loss                          | ** ** | **(95,050**           | **)**         | 2,130 |   |
| Benefit obligation at end of year               | ** ** | **$**                 | **3,778,374** |   | $ | 3,784,500 |   |
|                                            |       |                  |          |   |   |
| **Change in plan assets during year**           |       |                  |          |   |   |
| Fair value of  plan assets at beginning of year | ** ** | **$**                 | **-0-**       |   | $ | -0- |   |
| Employer  contributions                         | ** ** | **158,532**           |          | 152,128 |   |
| Benefit payments                                | ** ** | **(158,532**          | **)**         | (152,128 | ) |
| Fair value of plan assets at end of year        | ** ** | **$**                 | **-0-**       |   | $ | -0- |   |

 
| ** **                                                   | ** ** | **December 31,** | ** **     |
|--------------------------------------------------------------|------------|-----------------------|----------------|
| ** **                                                   | ** ** | **2007**              | ** **     | **2006** | ** ** |
| **Funded status**                                            | ** ** | ** **            | ** **     | ** ** | ** ** |
| Funded status                                                | ** ** | **$**                 | **(3,778,374** | **)** | $ | (3,784,500 | ) |
| Unrecognized net  loss                                       | ** ** | **504,416**           |           | 654,720 |   |
| Unrecognized  prior service cost                             | ** ** | **232,652**           |           | 465,304 |   |
| Net liability  recognized                                    | ** ** | **$**                 | **(3,041,306** | **)** | $ | (2,664,476 | ) |
|                                                         |       |                  |           |   |   |
| **Change in accumulated other comprehensive income**         |       |                  |           |   |   |
| Accumulated  other Comprehensive Income at beginning of year | ** ** | **$**                 | **1,120,024**  |   | $ | 746,982 |   |
|                                                         |       |                  |           |   |   |
| Recognition of  intangible asset required under FAS 158      | ** ** | **—**            |           | 697,956 |   |
| Amortization of  net loss                                    | ** ** | **(55,254**           | **)**          | (94,392 | ) |
| Actuarial gain  (loss)                                       | ** ** | **(95,050**           | **)**          | 2,130 |   |
| Amortization of  prior service cost                          | ** ** | **(232,652**          | **)**          | (232,652 | ) |
| Net change in  other comprehensive income                    | ** ** | **(382,956**          | **)**          | (373,042 | ) |
| Accumulated  other Comprehensive Income at end of year       | ** ** | **$**                 | **737,068**    |   | $ | 1,120,024 |   |

 

 

72

----

 
|                                                                    |       |       |       |
|-------------------------------------------------------------------------|------------|------------|------------|
| **Expected cash-flow information for years after  current fiscal year** | ** ** | ** ** | ** ** |
| 2008                                                                    |       | $          | 158,792    |   |
| 2009                                                                    |       | 158,792    |       |
| 2010                                                                    |       | 167,814    |       |
| 2011                                                                    |       | 267,053    |       |
| 2012                                                                    |       | 267,053    |       |
| 2013-2017                                                               |       | 1,766,196  |       |
|                                                                         |            |            |            |  |

 
|                                |       |        |        |       |       |
|-------------------------------------|------------|-------------|-------------|------------|------------|
| ** **                          | ** ** | **2007**    | ** **  | **2006**   | ** ** |
| **Net periodic benefit cost**       | ** ** | ** **  | ** **  | ** ** | ** ** |
| Service cost                        | ** ** | **$**       | **34,413**  |       | $          | 32,543 |   |
| Interest cost                       | ** ** | **213,043** |        | 207,808    |       |
| Amortization of  prior service cost | ** ** | **232,652** |        | 232,652    |       |
| Amortization of  net (gain) or loss | ** ** | **55,254**  |        | 94,392     |       |
| Net periodic  benefit cost          | ** ** | **$**       | **535,362** |       | $          | 567,395 |   |
| ** **                          | ** ** | ** **  | ** **  | ** ** | ** ** |
| **Key Assumptions**                 | ** ** | ** **  | ** **  | ** ** | ** ** |
| Discount rate  during the year      | ** ** | **5.75**    | **%**       | 5.75       | %          |
| Discount rate at  end of year       | ** ** | **6.00**    | **%**       | 5.75       | %          |

 

**12.          RegulatoryCapital Requirements**

 

The Bank issubject to various regulatory capital requirements administered by the federalbanking agencies.  Failure to meet minimumcapital requirements can initiate certain mandatory and possibly additionaldiscretionary actions by regulators that, if undertaken, could have a directmaterial effect on the Bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the Bank’s assets,liabilities and certain off-balance-sheet items as calculated under regulatoryaccounting practices.  The Bank’s capitalamounts and classification are also subject to qualitative judgments by theregulators about components, risk weightings and other factors.  Qualitative measures established byregulation to ensure capital adequacy require the Bank to maintain minimumamounts and ratios (set forth in the following table) of total Tier 1 capital(as defined in the regulations) to risk weighted assets (as defined), and ofTier 1 capital (as defined) to average assets (as defined).  Management believes, as of December 31,2007, that the Bank meets all capital adequacy requirements to which it issubject.

 

As of December 31,2007, the most recent notification from the FDIC categorized the Bank as wellcapitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, theBank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1leverage ratios as set forth in the table. There are no conditions or events since that notification thatmanagement believes have changed the Bank’s category.

 

The Bank’s actualcapital amounts and ratios are presented in the table below:

 
| ** **                        | ** ** | **Actual** | ** ** | **For  Capital Adequacy  Purposes** | ** ** | **To Be  Well  Capitalized Under  Prompt Corrective  Action Provisions** | ** ** |
|-----------------------------------|------------|------------|------------|-------------------------------------|------------|--------------------------------------------------------------------------|------------|
|                              | ** ** | **Amount** | ** ** | **Ratio**                           | ** ** | **Amount**                                                               | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
|                              |       |       |       |                                |       | **(Dollars  in Thousands)**                                              |       |   |   |   |   |
| **As of December 31, 2007:** | * *   | * *   |       |                                |       | ** **                                                               |       |   |   |   |   |
| Tier 1 Capital                    | ** ** | **$**      | **44,628** | ** **                          | **10.52**  | **%**                                                                    | **$**      | **16,964** | ** ** | **4.00** | **%** | **$** | **21,205** | ** ** | **5.00** | **%** |
| (to average  assets)              |       |       |       |                                |       |                                                                     |       |   |   |   |   |   |   |
| Tier 1 Capital                    | ** ** | **44,628** | ** ** | **16.35**                           | ** ** | **10,921**                                                               | ** ** | **4.00** | ** ** | **16,381** | ** ** | **6.00** | ** ** |
| (to risk-weighted  assets)        |       |       |       |                                |       |                                                                     |       |   |   |   |   |   |   |
| Total Capital                     | ** ** | **47,459** | ** ** | **17.38**                           | ** ** | **21,841**                                                               | ** ** | **8.00** | ** ** | **27,302** | ** ** | **10.00** | ** ** |
| (to  risk-weighted assets)        |       |       |       |                                |       |                                                                     |       |   |   |   |   |   |   |
| As of December 31, 2006:     |       |       |       |                                |       |                                                                     |       |   |   |   |   |   |   |
| Tier 1 Capital                    |       | $          | 35,636     |                                | 8.98       | %                                                                        | $          | 15,882 |   | 4.00 | % | $ | 19,852 |   | 5.00 | % |
| (to average assets)               |       |       |       |                                |       |                                                                     |       |   |   |   |   |   |   |
| Tier 1 Capital                    |       | 35,636     |       | 14.05                               |       | 10,148                                                                   |       | 4.00 |   | 15,222 |   | 6.00 |   |
| (to  risk-weighted assets)        |       |       |       |                                |       |                                                                     |       |   |   |   |   |   |   |
| Total Capital                     |       | 38,355     |       | 15.12                               |       | 20,296                                                                   |       | 8.00 |   | 25,370 |   | 10.00 |   |
| (to  risk-weighted assets)        |       |       |       |                                |       |                                                                     |       |   |   |   |   |   |   |

 

 

73

----

 

 

The Bank’s capitalat December 31, 2007 and 2006 for financial statement purposes differsfrom Tier 1 capital amounts by $115,000 and $693,000, respectively,representing the exclusion for regulatory purposes of unrealized gains and losseson securities available for sale and $901,000 and $1.4 million, respectively,representing the exclusion of amounts in accumulated other comprehensive incomefrom the adoption and application of SFAS No.158.

 

**13.Related Party Transactions**

 

The Bank maintainsa lease agreement with the Holding Company for one of its office locations. Theinitial lease term expires in September 2015 and the Bank has paid $42,000each year for the years ended December 31, 2007 and 2006.  In addition, the Bank maintains a managementfee agreement with the Holding Company which provides for the sharing ofcertain company related expenses.  Suchexpenses include salaries and benefits, insurance expenses, professional feesand directors fees.  The Bank hasreceived management fees amounting to $420,000 and $480,000 for the years endedDecember 31, 2007 and 2006, respectively.

 

**14. FairValue of Financial Instruments**

 

Financialinstruments include such items as loans, deposits, securities and otherinstruments.

 

Fair value estimatesare generally subjective in nature and are dependent on a number of significantassumptions associated with each instrument or group of similar instruments,including estimates of discount rates, risks associated with specific financialinstruments, estimates of future cash flows and relevant available marketinformation. Fair value information is intended to represent an estimate of anamount at which a financial instrument could be exchanged in a currenttransaction established between a willing buyer and seller engaging in anexchange transaction.  However, sincethere are no established trading markets for a significant portion of the Bank’sfinancial instruments, the Bank may not be able to immediately settle itsfinancial instruments; as such, the fair values are not necessarily indicativeof the amounts that could be realized through immediate settlement. Inaddition, the majority of the Bank’s financial instruments, such as loans anddeposits, are held to maturity and are realized or paid according to thecontractual agreement with the customer.

 

Where available,quoted market prices should be used to estimate fair values. However, due tothe nature of the Bank’s financial instruments, in many instances quoted marketprices are not available. Accordingly, the Bank has estimated fair value basedon other valuation techniques permitted by the standard, such as discountingestimated future cash flows using a rate commensurate with the risks involvedor other acceptable methods. Fair values are required to be estimated withoutregard to any premium or discount that may result from concentrations ofownership of a financial instrument, possible income tax ramifications orestimated transaction costs. Fair values are also estimated at a specific pointin time and are based on interest rate and other assumptions at that date. Asthe assumptions underlying these estimates change, the fair values of financialinstruments will change. The aggregate fair value amounts presented do notpurport to represent and should not be considered to be representative of theunderlying “market” or franchise value of the Bank.

 

The methods andassumptions used to estimate the fair values of each class of financialinstruments are as follows:

 

***Cashand Cash Equivalents*** — These items are generally short-term in nature and, accordingly, thecarrying amounts reported in the balance sheet are reasonable approximations oftheir fair values.

 

***Investmentand Mortgage-Backed Securities*** — Fair values for investment and mortgage-backed securitiesare based on quoted market prices.

 

***LoansReceivable*** —The fair value was estimated by discounting approximate cash flow of theportfolio to achieve a current market yield. Consideration was given toprepayment speeds, economic conditions, risk characteristics and other factorsconsidered appropriate.

 

 

 

74

----

 

***LoansHeld for Sale***— Fair values of mortgage loans held for sale are based on commitments on handfrom investors of prevailing market rates.

 

***FHLBStock*******— The carrying value of FHLB stockapproximates fair value based on redemption provisions of the FHLB.

 

***AccruedInterest Receivable and Payable*** — The carrying value of accrued interest receivableand payable approximates fair value.

 

***Depositsand FHLB Advances and Other Borrowed Money*** — As required by the standard, the fair values ofdeposits subject to immediate withdrawal, such as interest and noninterestchecking, passbook savings and money market demand deposit accounts, are equalto their carrying amounts in the accompanying statement of financial condition.Fair values for time deposits and FHLB advances and other borrowed money areestimated by discounting future cash flows using interest rates currentlyoffered on these instruments with similar remaining maturities.

 

***Off-Balance-SheetInstruments*** —Fair values for off-balance-sheet lending commitments are based on feescurrently charged to enter similar agreements, taking into account the runningterms of the agreements and counterparties’ credit standing.

 

The estimated fairvalue of the Bank’s financial instruments at December 31, 2007, and 2006was as follows:

 
| ** **                                     | ** ** | **2007**            | ** ** | **2006**            | ** ** |
|------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                                     | ** ** | **Carrying**        | ** ** | **Estimated**       | ** ** | **Carrying** | ** ** | **Estimated** | ** ** |
| ** **                                     | ** ** | **Amount**          | ** ** | **Fair  Value**     |       | **Amount** | ** ** | **Fair  Value** |   |
| ** **                                     | * *   | **(In  thousands)** | ** ** | **(In  thousands)** |       |
|                                           |       |                |       |                |       |   |   |   |   |
| Assets:                                        |       |                |       |                |       |   |   |   |   |
| Cash and due  from banks                       | ** ** | **$**               | **3,918**  | ** **          | **$**      | **3,918** |   | $ | 3,106 |   | $ | 3,106 |   |
| Interest bearing  deposits at banks            | ** ** | **38,161**          | ** ** | **38,161**          |       | 45,177 |   | 45,177 |   |
| Investment  securities                         | ** ** | **67,861**          | ** ** | **68,441**          |       | 59,304 |   | 59,942 |   |
| Mortgage-backed  securities                    | ** ** | **35,632**          | ** ** | **35,632**          |       | 43,636 |   | 43,636 |   |
| Loans receivable                               | ** ** | **256,932**         | ** ** | **255,323**         |       | 235,761 |   | 234,545 |   |
| Loans held for  sale                           | ** ** | **—**          | ** ** | **—**          |       | 125 |   | 125 |   |
| FHLB stock                                     | ** ** | **2,310**           | ** ** | **2,310**           |       | 2,549 |   | 2,549 |   |
| Accrued interest  receivable                   | ** ** | **1,932**           | ** ** | **1,932**           |       | 1,932 |   | 1,932 |   |
|                                           |       |                |       |                |       |   |   |   |   |
| Liabilities:                                   |       |                |       |                |       |   |   |   |   |
| NOW and MMDA  deposits (1)                     | ** ** | **$**               | **91,105** | ** **          | **$**      | **91,105** |   | $ | 90,092 |   | $ | 90,092 |   |
| Other savings  deposits                        | ** ** | **38,223**          | ** ** | **38,223**          |       | 43,512 |   | 43,512 |   |
| Certificate  accounts                          | ** ** | **201,860**         | ** ** | **202,283**         |       | 200,228 |   | 199,086 |   |
| FHLB  advances & other borrowed money | ** ** | **37,000**          | ** ** | **39,248**          |       | 37,172 |   | 38,716 |   |
| Accrued interest  payable                      | ** ** | **271**             | ** ** | **271**             |       | 298 |   | 298 |   |
| Off balance  sheet instruments                 |       | —              |       | —              |       | — |   | — |   |

----

 (1) Includes non-interest bearingaccounts

 

 

75

----

 

**15. Condensed Financial Information — Parent Corporation Only**

 

**CONDENSEDBALANCE SHEET**

** **
| ** **                                           | ** ** | **December 31,  2007** | ** **     |
|------------------------------------------------------|------------|-----------------------------|----------------|
| **ASSETS:**                                          | ** ** | ** **                  | ** **     |
| Cash and cash equivalents                            | ** ** | **$**                       | **6,773,010**  | ** ** |
| Loan receivable — ESOP                          | ** ** | **843,108**                 | ** **     |
| Investment in Alliance Bank                          | ** ** | **43,842,166**              | ** **     |
| Total assets                                         | ** ** | **$**                       | **51,458,284** | ** ** |
| ** **                                           | ** ** | ** **                  | ** **     |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**       | ** ** | ** **                  | ** **     |
| **STOCKHOLDERS’ EQUITY**                        | ** ** | **51,458,284**              | ** **     |
| Total stockholders’ equity                      | ** ** | **51,458,284**              | ** **     |
|                                                 |       |                        |           |
| **TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY** | ** ** | **$**                       | **51,458,284** | ** ** |

 

** CONDENSED INCOME STATEMENT**

** **
| ** **                                            | ** ** | **From January 30,  2007  to December 31, 2007** | ** **    |
|-------------------------------------------------------|------------|------------------------------------------------------------|---------------|
| **INCOME:**                                           | ** ** | ** **                                                 | ** **    |
| Interest income                                       | ** ** | **$**                                                      | **67,655**    | ** ** |
| Total income                                          | ** ** | **67,655**                                                 | ** **    |
| ** **                                            | ** ** | ** **                                                 | ** **    |
| **EXPENSES:**                                         | ** ** | ** **                                                 | ** **    |
| Legal Fees                                            | ** ** | **32,000**                                                 | ** **    |
| Stock Related Expense                                 | ** ** | **36,600**                                                 | ** **    |
| Total expenses                                        | ** ** | **68,600**                                                 | ** **    |
|                                                  |       |                                                       |          |
| **LOSS BEFORE INCOME TAXES:**                         | ** ** | **(945**                                                   | **)**         |
| ** **                                            | ** ** | ** **                                                 | ** **    |
| **EQUITY IN UNDISTRUBUTED NET INCOME  OF SUBSIDIARY** | ** ** | **1,055,887**                                              | ** **    |
| ** **                                            | ** ** | ** **                                                 | ** **    |
| **Income Taxes**                                      | ** ** | **—**                                                 | ** **    |
|                                                  |       |                                                       |          |
| **NET INCOME**                                        | ** ** | **$**                                                      | **1,054,942** | ** ** |

 

 

76

----

 

**CONDENSED STATEMENT OF CASH FLOWS**

** **
| ** **                                                      | ** ** | **From January 30,  2007 to  December 31, 2007** | ** **    |
|-----------------------------------------------------------------|------------|------------------------------------------------------------|---------------|
| **OPERATING ACTIVITIES:**                                       | ** ** | ** **                                                 | ** **    |
|                                                            |       |                                                       |          |
| Net Income                                                      | ** ** | **$**                                                      | **1,054,942** | ** ** |
| Adjustments to reconcile net income to cash used in operations: |       |                                                       |          |
| Undistributed net income of subsidiary                          | ** ** | **(1,055,887**                                             | **)**         |
| Net cash used in operating activities                           | ** ** | **(945**                                                   | **)**         |
|                                                            |       |                                                       |          |
| **INVESTING ACTIVITIES:**                                       | ** ** | ** **                                                 | ** **    |
| ** **                                                      | ** ** | ** **                                                 | ** **    |
| Disbursement for ESOP loan                                      | ** ** | **(903,330**                                               | **)**         |
| Principal repayments on ESOP loan                               | ** ** | **60,222**                                                 | ** **    |
| Net cash used in investing activities                           | ** ** | **(843,108**                                               | **)**         |
|                                                            |       |                                                       |          |
| **FINANCING ACTIVITIES:**                                       | ** ** | ** **                                                 | ** **    |
|                                                            |       |                                                       |          |
| Net proceeds from equity offering                               | ** ** | **16,484,799**                                             | ** **    |
| Contribution of capital to Alliance Bank                        | ** ** | **(8,249,998**                                             | **)**         |
| Dividends paid                                                  | ** ** | **(617,738**                                               | **)**         |
| Net cash provided by financing activities                       | ** ** | **7,617,063**                                              | ** **    |
|                                                            |       |                                                       |          |
| Net increase in cash and  cash equivalents                      | ** ** | **6,773,010**                                              | ** **    |
| Cash and cash equivalents  — beginning of period           | ** ** | **—**                                                 | ** **    |
|                                                            |       |                                                       |          |
| Cash and cash equivalents  — end of period                 | ** ** | **$**                                                      | **6,773,010** | ** ** |

 

Since Alliance Bancorp, Inc. of Pennsylvania was formed in January 30,2007, no condensed financial information are presented for January 1, 2007or January 29, 2007.

 

 

77

----

 

**Item 9.  Changes in andDisagreements with Accountants on Accounting and Financial Disclosure.**

 

Not applicable.

 

**Item 9A (T).  Controls andProcedures.**

 

Certain of the information required herein is incorporated by referencefrom item 8 of this report.

 

**Item 9A.  Controls andProcedures.**

 

The Company’s management evaluated, with the participation of the ChiefExecutive Officer and Chief Financial Officer, the effectiveness of theCompany’s disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) as of the end of theperiod covered by this report. Based on such evaluation, the Chief ExecutiveOfficer and the Chief Financial Officer have concluded that the Company’sdisclosure controls and procedures are designed to ensure that financialinformation required to be disclosed by the Company in the reports that arefiled or submitted under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in theSEC’s rules and regulations and are operating in an effective manner.

 

No change in the Company’s internal control over financial reporting(as defined in Rules 13a-15(f) and 15d-15(f) under theSecurities Exchange Act of 1934) occurred during the most recent fiscal quarterthat has materially affected, or is reasonably likely to materially affect, itsinternal control over financial reporting.

 

**Item 9B.  Other Information.**

 

Not applicable.

 

**PART III.**

 

**Item 10.  Directors, ExecutiveOfficers and Corporate Governance.**

 

The information required herein is incorporated byreference from the Bank’s definitive proxy statement dated March 24, 2008(“Definitive Proxy Statement”).

 

**Item 11.  Executive Compensation.**

 

The information required herein is incorporated by reference from theDefinitive Proxy Statement.

 

**Item 12. Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters.**

 

The information required herein is incorporated by reference from theDefinitive Proxy Statement.

 

**Item 13.  Certain Relationshipsand Related Transactions, and Director Independence.**

 

The information required herein is incorporated by reference from theDefinitive Proxy Statement

 

**Item 14.  Principal AccountingFees and Services.**

 

The information required herein is incorporated by reference from theDefinitive Proxy Statement

 

 

78

----

 

**PART IV.**

 

**Item 15.  Exhibits and FinancialStatement Schedules.**

 

   (1) The followingfinancial statements are incorporated by reference from Item 8 hereof (see Exhibit 13):

 
|   | Reports of Independent  Registered Public Accounting Firms.                                                                            |
|--------|----------------------------------------------------------------------------------------------------------------------------------------|
|   | Consolidated Statements of  Financial Condition at December 31, 2007 and 2006.                                                    |
|   | Consolidated Statements of Income for each of the Two Years in the  Period Ended December 31, 2007.                               |
|   | Consolidated Statements of Changes in Stockholders’ Equity for each  of the Two Years in the Period Ended December 31, 2007. |
|   | Consolidated Statements of Cash Flows for each of the Two Years in  the Period Ended December 31, 2007.                           |
|   | Notes to Consolidated  Financial Statements.                                                                                           |

 

 

  (2) All schedules areomitted because of the absence of conditions under which they are required orbecause the required information is included in the financial statements andrelated notes thereto.

 

  (3) The following exhibitsare filed as part of this Form 10-K and this list includes the Exhibit Index.

 
| **No** | ** ** | **Description**                                                                                                                            |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1    |       | Federal Stock Charter of  Alliance Bancorp, Inc. of Pennsylvania*                                                                     |
| 3.2    |       | Bylaws of Alliance  Bancorp, Inc. of Pennsylvania**                                                                                   |
| 4.0    |       | Form of Stock Certificate  of Alliance Bancorp, Inc. of Pennsylvania*                                                            |
| 10.1   |       | Greater Delaware Valley  Savings d/b/a Alliance Bank Supplemental Executive Retirement Plan and  Participation Agreement*                  |
| 10.2   |       | Greater Delaware Valley  Savings d/b/a Alliance Bank Endorsement Split Dollar Insurance Agreement*                                         |
| 10.3   |       | Form of Agreement  between Greater Delaware Savings Bank (doing business as Alliance Bank) and  Dennis D. Cirucci and Peter J. Meier* |
| 10.4   |       | Form of Agreement  between Greater Delaware Savings Bank (doing business as Alliance Bank) and  Suzanne J. Ricci*                     |
| 23.1   |       | Consent of Beard  Miller Company LLP                                                                                                  |
| 23.2   |       | Consent of  Deloitte & Touche LLP                                                                                                 |
| 31.1   |       | Section 302  Certification of the Chief Executive Officer                                                                             |
| 31.2   |       | Section 302  Certification of the Chief Financial Officer                                                                             |
| 32.1   |       | Section 906  Certification of the Chief Executive Officer                                                                             |
| 32.2   |       | Section 906  Certification of the Chief Financial Officer                                                                             |

----

*                      Incorporatedherein by reference from the Company’s Registration Statement on Form S-1(File No. 333-136853) filed with the Securities and Exchange Commission.

 

**               Incorporatedherein by reference from the Company’s Current Report on Form 8-K filedwith the Securities and Exchange Commission on December 19, 2007.

 

 

79

----

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| ** **                  | **ALLIANCE  BANCORP, INC, OF PENNSYLVANIA** |
|-----------------------------|---------------------------------------------|
|                        |                                        |   |   |
| Dated:  March 24, 2008 | By:                                         | /s/ Dennis D. Cirucci |   |
|                        |                                        | Dennis D. Cirucci |   |
|                        |                                        | President and |   |
|                        |                                        | Chief Executive Officer |   |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 
| /s/Dennis D. Cirucci                          |   |   | March 24, 2008 |
|-----------------------------------------------|--------|--------|---------------------|
| Dennis D. Cirucci                             |   |   |                |
| President                                     |   |   |                |
| and Chief Executive  Officer                  |   |   |                |
| (Principal Executive  Officer)                |   |   |                |
|                                          |   |   |                |
|                                          |   |   |                |
| /s/Peter J. Meier                             |   |   | March 24, 2008 |
| Peter J. Meier                                |   |   |                |
| Executive Vice President                      |   |   |                |
| and Chief Financial  Officer                  |   |   |                |
| (Principal Financial and  Accounting Officer) |   |   |                |
|                                          |   |   |                |
|                                          |   |   |                |
| /s/William E. Hecht                           |   |   | March 24, 2008 |
| William E. Hecht                              |   |   |                |
| Chairman of the Board                         |   |   |                |
|                                          |   |   |                |
|                                          |   |   |                |
| /s/J. William  Cotter, Jr.               |   |   | March 24, 2008 |
| J. William  Cotter, Jr.                  |   |   |                |
| Director                                      |   |   |                |
|                                          |   |   |                |
|                                          |   |   |                |
| /s/John A. Raggi                              |   |   | March 24, 2008      |
| John A. Raggi                                 |   |   |                |
| Director                                      |   |   |                |

 

 

80

----

 

 

 
| /s/Philip K. Stonier   |   |   | March 24, 2008 |
|------------------------|--------|--------|---------------------|
| Philip K. Stonier      |   |   |                |
| Director               |   |   |                |
|                   |   |   |                |
|                   |   |   |                |
|  /s/James S. Carr |   |   | March 24, 2008 |
| James S. Carr          |   |   |                |
| Director               |   |   |                |
|                   |   |   |                |
|                   |   |   |                |
| /s/G. Bradley Rainer   |   |   | March 24, 2008 |
| G. Bradley Rainer      |   |   |                |
| Director               |   |   |                |
|                   |   |   |                |
|                   |   |   |                |
| /s/R. Cheston Woolard  |   |   | March 24, 2008 |
| R. Cheston Woolard     |   |   |                |
| Director               |   |   |                |
|                   |   |   |                |
|                   |   |   |                |
| /s/Timothy E. Flatley  |   |   | March 24, 2008 |
| Timothy E. Flatley     |   |   |                |
| Director               |   |   |                |

 

 

 

81

----

 

**Corporate Information**

 

| **Independent Registered Public  Accounting Firm** | **Investor Information**                           |
|----------------------------------------------------|----------------------------------------------------|
| Beard Miller Company LLP                           | Investors, analysts and  others seeking financial  |
| 1200 Atwater Drive,  Suite 225                | information may contact:                           |
| Malvern, PA 19355                                  | Kathleen P. Lynch                                  |
|                                               | Corporate Secretary                                |
|                                               | 541 Lawrence Road                                  |
| **Market Makers**                                  | Broomall, PA 19008-3599                            |
| FTN Midwest Securities Corp                        | (610)353-2900                                      |
| Sandler O’  Neill & Partners, LP     |                                               |
| USB Financial  Services, Inc.                 | **Transfer Agent**                                 |
| Stifel,  Nicholas, & Company, Inc.   | Direct questions regarding  dividend checks,       |
|                                               | address and name changes  or lost certificates to: |
|                                               | Registrar and Transfer Company                     |
| **Securities Counsel**                             | 10 Commerce Drive                                  |
| Elias, Matz,  Tiernan & Herrick LLP       | Cranford, NJ 07016                                 |
| 734 15th Street, NW, 12th  Floor                   |                                               |
| Washington, D.C. 20005                             |                                               |

 

 

 

**MarketInformation**

 

AllianceBancorp Common Stock is traded on the Nasdaq Global Market and quoted under thesymbol “ALLB”.    The prices shown belowreflect the prices reported by the Nasdaq system adjusted for thereorganization.  The closing price on December 31,2007 was $7.31 per share.  There were7,225,000 shares outstanding as of December 31, 2007, comprised of3,973,750 shares held by Alliance Mutual Holding Company and 3,251,250 sharesheld by approximately 1,400 stockholders.

 
| **For the Quarter Ended**   | ** ** | **High**  | ** ** | **Low**    | ** ** | **Close** | ** ** | **Cash Dividends Declared** | ** ** |
|-----------------------------|------------|-----------|------------|------------|------------|-----------|------------|-----------------------------|------------|
|                        |       |      |       |       |       |      |       |                        |       |
| **December 31, 2007**  | ** ** | **$**     | **9.15**   | ** ** | **$**      | **7.15**  | ** ** | **$**                       | **7.31**   | ** ** | **$** | **.05** | ** ** |
|                        |       |      |       |       |       |      |       |                        |       |
| **September 30, 2007** | ** ** | **9.44**  | ** ** | **8.39**   | ** ** | **9.10**  | ** ** | **.05**                     | ** ** |
|                        |       |      |       |       |       |      |       |                        |       |
| **June 30, 2007**      | ** ** | **9.59**  | ** ** | **9.00**   | ** ** | **9.29**  | ** ** | **.05**                     | ** ** |
|                        |       |      |       |       |       |      |       |                        |       |
| **March 31, 2007**     | ** ** | **10.50** | ** ** | **9.00**   | ** ** | **9.05**  | ** ** | **.04**                     | ** ** |
|                        |       |      |       |       |       |      |       |                        |       |
| December 31, 2006      |       | $         | 11.41      |       | $          | 10.37     |       | $                           | 10.54      |   | $ | .04 |   |
|                        |       |      |       |       |       |      |       |                        |       |
| September 30, 2006     |       | 11.81     |       | 9.99       |       | 11.59     |       | .04                         |       |
|                        |       |      |       |       |       |      |       |                        |       |
| June 30, 2006          |       | 12.50     |       | 11.07      |       | 11.81     |       | .04                         |       |
|                        |       |      |       |       |       |      |       |                        |       |
| March 31, 2006         |       | 12.41     |       | 11.40      |       | 11.52     |       | .04                         |       |

 

 

82

----