**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, 2006 |
| OR                                           |
| o                                            |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

** **

**For thetransition period from                to                **

**CommissionFile No.:  001-33189**

**ALLIANCE BANCORP, INC. OFPENNSYLVANIA**

(Exact name of registrant asspecified in its charter)

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

 

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

Securities registered pursuant toSection 12(b) of the Act:

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

 

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

Indicate by check mark if theRegistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities 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 whetherthe Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the  preceding 12 months (or for such  shorter period that the  Registrant was required  to file such  reports),  and (2) has  been  subject to such  filing requirements forthe past 90 days. Yes x   No o

Indicate by check mark ifdisclosure of delinquent  filers  pursuant to Item 405 of Regulation  S-K is not contained  herein, and will not be contained,  to thebest  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 Form10-K.   o

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

Large accelerated filer o         Accelerated filer o         Non-acceleratedfiler x

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

As of March 16, 2007, the aggregate value of the2,960,276 shares of Common Stock of the Registrant issued and outstanding onsuch date, which excludes 3,973,750 shares held by the Registrant’s mutualholding company, Alliance Mutual Holding Company, and 290,974 shares held byall directors and officers of the Registrant and the Registrant’s EmployeeStock Ownership Plan (“ESOP”) as a group, was approximately $27.2 million.  This figure is based on the last known tradeprice of $9.20 per share of the Registrant’s Common Stock on March 16,2007.  Although directors and officersand the ESOP were assumed to be “affiliates” of the Registrant for purposes ofthis calculation, the classification is not to be interpreted as an admissionof such status.

The number of shares outstandingof Common Stock of the Registrant as of March 28, 2007, was 7,225,000.

**DOCUMENTSINCORPORATED BY REFERENCE**

(1)                                  Portionsof the Annual Report to Stockholders for the year ended December 31, 2006 areincorporated into Part II.

(2)                                  Portionsof the definitive proxy statement for the 2006 Annual Meeting of Stockholdersare incorporated into Part III.

 

----

 

**PART I**

**Item 1.  Business**

**General**

Alliance Bank (“Alliance Bank” or the “Bank”) is acommunity oriented savings bank headquartered in Broomall, Pennsylvania.  We operate a total of nine banking officeslocated 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, 2006, we had $410.4 million of total assets, $333.8 million oftotal deposits and stockholders’ equity of $33.5 million.

OnJanuary 30, 2007, the Bank completed its reorganization to a mid-tier holdingcompany structure and the sale by the mid-tier company, Alliance Bancorp, Inc.of Pennsylvania (“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. Each share of the Bank’s common stock was converted into 2.09945 sharesof the Company.  The offering resulted inapproximately $16.5 million in net proceeds. Since Alliance Bancorp had no operations as of December 31, 2006, thediscussion in this Item 1 covers the Bank, not the Company.

The Bank is primarily engaged in attracting deposits from the generalpublic through its branch offices and using such deposits primarily to (i)originate and purchase loans secured by first liens on single-family(one-to-four units) residential and commercial real estate properties and (ii)invest in securities issued by the United States (“U.S.”) Government andagencies thereof, municipal and corporate debt securities and certain mutualfunds.  The Bank derives its incomeprincipally from interest earned on loans, mortgage-backed securities andinvestments and, to a lesser extent, from fees received in connection with theorigination of loans and for other services. The Bank’s primary expenses are interest expense on deposits andborrowings and general operating expenses. Funds for activities are provided primarily by deposits, repayments andprepayments of outstanding loans and mortgage-backed securities and othersources.

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.

**Market Area andCompetition**

Alliance Bank isheadquartered in Broomall, Pennsylvania and conducts its business through eightoffices located in Delaware County, Pennsylvania, and one office in ChesterCounty, Pennsylvania.  The primary marketareas served by Alliance Bank are Delaware and Chester Counties, Philadelphia,and the suburban areas to the west and south of Philadelphia, includingsouthern New Jersey.  The areas served bythe Bank are included in the Philadelphia Primary Metropolitan Statistical Area(“PMSA”).  The Philadelphia PMSA is thenation’s fourth largest metropolitan area based on total population.  Based on 2000 census data, the PhiladelphiaPMSA population was estimated at 5.0 million, including 1.0 million people inDelaware and Chester Counties. Population growth in Chester County has increased at a relatively strong1.7% annual rate during the 2000-2005 period, while the population in DelawareCounty has increased at a comparatively modest annual pace of 0.5% over thattime.  The media household income in 2005for Delaware and Chester Counties was $62,297 and $81,043, respectively,compared to $48,534 and $49,747, respectively, for the Commonwealth ofPennsylvania and the United States. Delaware and Chester Counties are bedroom communities to nearlyPhiladelphia, although local employment has continued to grow as many employershave found suburban locations to be attractive. The economy in the Bank’s market area is relatively diverse and includesthe education, health and social services sector, manufacturing, theprofessional and scientific sector and the finance, insurance, real estate andleasing sector.  The largest employers inDelaware County include Boeing, the Keystone Crozer Health System, Wyeth-AyerstLaboratories, Mercy Health and Villanova University, while the largestemployers in Chester County include Vanguard Securities and QVC.

We face significant competition in originating loansand attracting deposits.  Thiscompetition stems primarily from commercial banks, other savings banks andsavings associations and mortgage-banking companies.  There are more than 350 financial institutionbranches located in Delaware and Chester Counties (not including creditunions).  Many of the financial serviceproviders operating in our market area are significantly larger, and havegreater financial resources, than us.  Weface additional competition for deposits from short-term money market funds and

2

----

other corporateand government securities funds, mutual funds and from other non-depositoryfinancial institutions such as brokerage firms and insurance companies.

**Lending Activities**

**General.**  At December 31, 2006, the Bank’s totalportfolio of loans receivable amounted to $238.6 million, or 58.2%, of the Bank’s$410.3 million of total assets at such time. The Bank has traditionally concentrated its lending activities on firstmortgage loans secured by residential property. However, over the past several years, the Bank has placed an emphasis onloans secured by commercial real estate properties.  Consistent with such approach, commercialreal estate loans amounted to $108.3 million or 45.4% of the total loan portfolioat December 31, 2006 as compared to $84.0 million or 40.4% at December 31,2001.  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, 2006, such loan categories amounted to $2.1 million,$11.8 million, $2.4 million and $5.5 million, respectively, or 0.9%, 4.9%, 1.0%and 2.3% of the total loan portfolio, respectively.

The Bank intendsto continue the origination of single-family residential mortgage loans as wellas its emphasis on increasing the origination of commercial real estateloans.  For the year ended December 31,2006, the Bank’s commercial real estate loans increased by $2.6 million or 2.5%to $108.3 million. For the year ended December 31, 2006, the Bank’ssingle-family mortgage loans increased by $4.4 million or 4.2% to $108.4million.   This loan growth wassupplemented by an increase in land and construction loans from $7.4 million atDecember 31, 2005 to $11.8 million at December 31, 2006.  The Bank believes the growth in land andconstruction loans in 2006 was due to lower than normalized growth in 2005.

 

3

----

 

**LoanPortfolio Composition**.  The following table sets forth thecomposition of the Bank’s loan portfolio by type of loan at the datesindicated.
| ** **                  | ** ** | **December 31,**                | ** ** |
|-----------------------------|------------|--------------------------------------|------------|
| ** **                  | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                  | ** ** | **Amount**                           | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **                  | ** ** | **(Dollars in Thousands)** | ** ** |
| Real estate loans:          |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Single-family  (1) (2)      |       | $                                    | 108,551    |   | 45.48 | % | $ | 104,020 |   | 45.79 | % | $ | 88,128 |   | 41.74 | % | $ | 86,907 |   | 40.80 | % | $ | 69,767 |   | 36.16 | % |
| Multi-family                |       | 2,088                                |       | 0.87 |   | 2,221 |   | 0.98 |   | 2,488 |   | 1.17 |   | 2,534 |   | 1.19 |   | 3,108 |   | 1.61 |   |
| Commercial                  |       | 108,339                              |       | 45.39 |   | 105,687 |   | 46.53 |   | 103,444 |   | 48.44 |   | 105,039 |   | 49.31 |   | 99,882 |   | 51.76 |   |
| Land  and construction: (3) |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                 |       | 6,700                                |       | 2.81 |   | 3,520 |   | 1.55 |   | 4,244 |   | 1.99 |   | 2,671 |   | 1.26 |   | 1,603 |   | 0.83 |   |
| Commercial                  |       | 5,074                                |       | 2.13 |   | 3,876 |   | 1.71 |   | 4,833 |   | 2.26 |   | 6,480 |   | 3.04 |   | 10,857 |   | 5.63 |   |
| Total  real estate loans    |       | 230,752                              |       | 96.68 |   | 219,324 |   | 96.55 |   | 204,137 |   | 95.60 |   | 203,631 |   | 95.60 |   | 185,217 |   | 95.99 |   |
|                        |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consumer:                   |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Student                     |       | 1,779                                |       | 0.75 |   | 2,440 |   | 1.07 |   | 2,946 |   | 1.38 |   | 2,974 |   | 1.40 |   | 2,838 |   | 1.47 |   |
| Savings  account            |       | 561                                  |       | 0.24 |   | 566 |   | 0.25 |   | 633 |   | 0.30 |   | 713 |   | 0.34 |   | 877 |   | 0.45 |   |
| Other                       |       | 103                                  |       | 0.04 |   | 88 |   | 0.04 |   | 57 |   | 0.03 |   | 69 |   | 0.03 |   | 93 |   | 0.05 |   |
| Total  consumer loans       |       | 2,443                                |       | 1.02 |   | 3,094 |   | 1.36 |   | 3,756 |   | 1.77 |   | 3,756 |   | 1.77 |   | 3,808 |   | 1.97 |   |
| Commercial business  loans  |       | 5,485                                |       | 2.30 |   | 4,745 |   | 2.09 |   | 5,754 |   | 2.69 |   | 5,611 |   | 2.63 |   | 3,937 |   | 2.04 |   |
| Total  loans receivable     |       | 238,680                              |       | 100.00 | % | 227,163 |   | 100.00 | % | 213,527 |   | 100.00 | % | 212,998 |   | 100.00 | % | 192,962 |   | 100.00 | % |
|                        |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Less:                       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unearned  income            |       | 1,075                                |       |   |   | 199 |   |   |   | 642 |   |   |   | 940 |   |   |   | 1,446 |   |   |   |
| Allowance  for loan losses  |       | 2,719                                |       |   |   | 2,670 |   |   |   | 2,608 |   |   |   | 2,240 |   |   |   | 3,347 |   |   |   |
|                        |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans  receivable, net      |       | $                                    | 235,886    |   |   |   | $ | 224,294 |   |   |   | $ | 210,277 |   |   |   | $ | 209,318 |   |   |   | $ | 188,169 |   |   |   |
|                        |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

(1)             At December 31, 2006, 2005, 2004, 2003, and 2002,includes $125,000, $-0-, $565,000, $640,000, and $1.2 million of loansclassified as held for sale, respectively.

(2)             At December 31, 2006, 2005, 2004, 2003, and 2002,includes $28.9 million, $22.8 million, $21.2 million, $19.9 million, and $12.0million respectively, of home equity loans.

(3)             At December 31, 2006, 2005, 2004, 2003,and 2002, excludes $9.7 million, $2.9 million, $5.4 million, $5.3 million, and$8.8 million respectively, of undisbursed funds on land and construction loans.

4

----

**Contractual Maturities**.  The following table sets forththe scheduled contractual maturities of the Bank’s loans receivable at December31, 2006.  Demand loans, loans having nostated schedule of repayments and no stated maturity and overdraft loans arereported as due in one year or less. Adjustable-rate loans are reported on a contractual basis rather than ona repricing basis.  The amounts shown foreach period do not take into account loan prepayments and normal amortizationof the Bank’s loan portfolio.
| ** **                                          | ** ** | **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                                    |       | $                               | 485        |             | $          | 181            |       | $                                   | 2,932      |   | $ | 8,963 |   | $ | 1,489 |   | $ | 440 |   | $ | 14,490 |   |
| After one year through three years                  |       | 3,193                           |       | 132              |       | 6,962          |       | 2,423                               |       | 243 |   | 1,040 |   | 13,993 |   |
| After three years through five years                |       | 5,046                           |       | 1,434            |       | 13,485         |       | —                              |       | 283 |   | 1,148 |   | 21,396 |   |
| After five years through fifteen years              |       | 36,773                          |       | 284              |       | 56,786         |       | —                              |       | 271 |   | 567 |   | 94,681 |   |
| Over fifteen years                                  |       | 62,551                          |       | 57               |       | 28,903         |       | —                              |       | 93 |   | 2,391 |   | 93,995 |   |
| Total (1)                                           |       | $                               | 108,048    |             | $          | 2,088          |       | $                                   | 109,068    |   | $ | 11,386 |   | $ | 2,379 |   | $5,586 |   | $ | 238,555 |   |
|                                                |       |                            |       |             |       |           |       |                                |       |   |   |   |   |   |   |
| Interest rate  terms on amounts due after one year: |       |                            |       |             |       |           |       |                                |       |   |   |   |   |   |   |
| Fixed                                               |       | $                               | 47,092     |             | $          | 1,907          |       | $                                   | 43,840     |   | — |   | — |   | $ | 2,769 |   | $ | 95,608 |   |
| Adjustable                                          |       | $                               | 60,471     |             | —     |           | $          | 62,296                              |       | $ | 2,423 |   | $ | 890 |   | $ | 2,377 |   | $ | 128,457 |   |

----

(1)             Does not include the effects relating tothe allowance for loan losses and unearned income.

Scheduled contractual amortization of loans does not reflect theexpected term of the Bank’s loan portfolio. The average life of loans is substantially less than their contractualterms because of prepayments and due-on-sale clauses, which gives the Bank theright to declare a conventional loan immediately due and payable in the event,among other things, that the borrower sells the real property subject to themortgage and the loan is not repaid.  Theaverage life of mortgage loans tends to increase when current mortgage loanrates are higher than rates on existing mortgage loans and, conversely,decrease when rates on existing mortgage loans are lower than current mortgageloan rates (due to refinancings of adjustable-rate and fixed-rate loans atlower rates).  Under the lattercircumstance, the weighted average yield on the loan portfolio decreases ashigher-yielding loans are repaid 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,** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                             | ** ** | **(In Thousands)**                    | ** ** |
|                                   |       |                                       |       |   |   |   |   |
| Real estate loan  originations:        |       |                                       |       |   |   |   |   |
| Single-family  (1)                     |       | $                                          | 33,660     |   | $ | 43,754 |   | $ | 33,139 |   |
| Multi-family                           |       | 640                                        |       | 1,864 |   | 3,217 |   |
| Commercial                             |       | 21,073                                     |       | 22,658 |   | 17,330 |   |
| Land and  construction:                |       |                                       |       |   |   |   |   |
| Residential                            |       | 6,208                                      |       | 1,462 |   | 4,275 |   |
| Commercial                             |       | 6,782                                      |       | — |   | 2,958 |   |
| Total real  estate loan originations   |       | 68,363                                     |       | 69,738 |   | 60,919 |   |
|                                   |       |                                       |       |   |   |   |   |
| Consumer originations:                 |       |                                       |       |   |   |   |   |
| Student                                |       | 482                                        |       | 602 |   | 736 |   |
| Savings account                        |       | 433                                        |       | 477 |   | 491 |   |
| Other                                  |       | 24                                         |       | 10 |   | 14 |   |
| Total consumer  loan originations      |       | 939                                        |       | 1,089 |   | 1,241 |   |
|                                   |       |                                       |       |   |   |   |   |
| Commercial business  originations      |       | 2,820                                      |       | 2,088 |   | 3,060 |   |
| Total loan  originations               |       | 72,122                                     |       | 72,915 |   | 65,220 |   |
|                                   |       |                                       |       |   |   |   |   |
| Purchase of real estate  loans:        |       |                                       |       |   |   |   |   |
| Single-family                          |       | —                                     |       | — |   | — |   |
| Multi-family                           |       | —                                     |       | — |   | — |   |
| Residential  construction              |       | —                                     |       | — |   | — |   |
| Commercial                             |       | 3,649                                      |       | 508 |   | 1,000 |   |
| Commercial  construction               |       | —                                     |       | — |   | 4,000 |   |
| Total real  estate loan purchases      |       | 3,649                                      |       | 508 |   | 5,000 |   |
| Total loan originations  and purchases |       | 75,771                                     |       | 73,423 |   | 70,220 |   |
|                                   |       |                                       |       |   |   |   |   |
| Less:                                  |       |                                       |       |   |   |   |   |
| Principal loan  repayments             |       | (61,814                                    | )          | (51,577 | ) | (60,460 | ) |
| Loans and  participations sold         |       | (2,319                                     | )          | (7,525 | ) | (8,519 | ) |
| Other, net (2)                         |       | (46                                        | )          | (120 | ) | (210 | ) |
|                                   |       |                                       |       |   |   |   |   |
| Net increase                           |       | $                                          | 11,592     |   | $ | 14,201 |   | $ | 959 |   |
|                                   |       |                                       |       |   |   |   |   |

----

(1)             Includes $19.3million, $9.8 million and $7.6 million of home equity loans and lines of creditoriginated during the years ended December 31, 2006, 2005 and 2004,respectively.

(2)             Includesgains on the sale of loans, provisions for loan and lease losses and transfersto other real estate owned.

**Origination, Purchase and Sale of Loans.**  Thelending activities of the Bank are subject to the written, non-discriminatory,underwriting standards and loan origination procedures established by the Bank’sBoard of Directors and management.  Loanoriginations are obtained by a variety of sources, including referrals fromreal estate brokers, builders, existing customers, advertising, walk-incustomers and, to a significant extent, mortgage brokers who obtain creditreports, appraisals and other documentation involved with a loan.  Property valuations are always performed byindependent outside appraisers.  Titleand hazard insurance are generally required on all security property other thanproperty securing a home equity loan, in which case the Bank obtains a titleopinion.  The majority of the Bank’sloans are secured by 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 a majorityvote of the Senior Loan Committee.  Loansover $2.0 million must be approved by the entire Board of Directors.  All loans are ratified by the Board ofDirectors.  The Senior Loan Committeecurrently consists of the Chief Executive Officer, the Chief Operating Officer,the Chief Financial Officer and two Senior Lending Officers.

The Bank’s single-family loan originations amounted to $33.7 million,$43.8 million and $33.1 million during 2006, 2005 and 2004, respectively.  When possible, the Bank emphasizes theorigination of single-family residential adjustable-rate mortgage loans (“ARMs”).  Originations of such loans amounted to $10.1million or 29.9%, $25.0 million or 57.1% and $14.4 million or 43.5% ofsingle-family residential real estate loan originations during 2006, 2005 and2004, respectively.  The Bank alsooriginates fixed-rate single-family residential real estate loans with terms offive, ten, twelve, 15 and 30 years. Generally, fixed-rate residential mortgage loans with terms greater than15 years have been originated pursuant to commitments to sell such loans tocorrespondent mortgage-banking institutions in order to reduce the proportionof the Bank’s loan portfolio comprised of such assets and reduce interest raterisk.  Loans are sold without anyrecourse to the Bank by the purchaser in the event of default on the loan bythe borrower and are sold with servicing released.  The Bank sold $2.3 million, $7.5 million and$8.9 million of long-term (generally over 15 years) fixed-rate residentialloans during 2006, 2005 and 2004, respectively. Such loan sales were conducted in furtherance of the Bank’sasset/liability strategies. At December 31, 2006, there was $125,000 of loansheld for sale compared to none at December 31, 2005.

In accordance with the Bank’s increased emphasis on commercial realestate loan originations, such originations amounted to $21.1 million, $22.7million and $17.3 million during 2006, 2005 and 2004, respectively.  In addition, land and construction loanoriginations amounted to $13.0 million, $1.5 million and $7.2 million during2006, 2005 and 2004, respectively.  TheBank believes the growth in land and construction loans in 2006 was due tolower than normalized growth in 2005.

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”).  The Bankrecognizes that these loans, which are considered subprime loans, haveadditional risk factors as compared to typical single-family residentiallending.  These loans are generally notsaleable in the secondary market due to the credit risk characteristics of theborrower, the underlying documentation, the loan-to-value ratio, or the size ofthe loan, among other factors.  AtDecember 31, 2006, 2005 and 2004, the Bank’s single-family loan portfolioincluded $23.3 million or 21.5%, $24.2 million or 23.3% and $18.3 million or20.5% of such loans, respectively.  TheBank reported $1.5 million or 6.5% and $1.9 million or 8.3% of these loans asnon-performing at December 31, 2006 and February 28, 2007, respectively.  The Bank recognizes the additional riskfactors associated with subprime lending and utilizes a higher risk-weightingfactor in maintaining its allowance for loan losses with respect to theseloans. In addition, management calculates and reports the delinquency ratio ofits subprime loan portfolio to the Board of Directors on a monthly basis.

Historically, the Bank has not been an active purchaser of loans.  However, the Bank purchased $3.6 million,$508,000 and $5.0 million during 2006, 2005 and 2004, respectively, of realestate loans, some of which are located outside of its primary lending area.  As of December 31, 2006, the outstandingbalance of such loans included $3.3 million, $418,000, $4.2 million and $4.6million secured by single-family, multi-family, commercial and constructionreal estate properties, respectively  AtDecember 31, 2006, none of these loans were reported as non-performing.

At December 31, 2006, 2005 and 2004, the Bank was servicing loans forothers amounting to $567,000, $577,000 and $587,000, respectively.  Such loans consist of commercial real estateand construction loan participations. Servicing loans for others generallyconsists of collecting mortgage payments, maintaining escrow accounts,disbursing payments to investors and foreclosure processing.  Loan servicing income is recorded uponreceipt and includes servicing fees from investors and certain chargescollected from borrowers, such as late payment fees.

**Single-Family Residential Real Estate Loans**.  The Bankhas historically concentrated its lending activities on the origination ofloans secured primarily by first mortgage liens on existing single-familyresidences and intends to continue to originate permanent loans secured byfirst mortgage liens on single-family residential properties in the future. AtDecember 31, 2006, $108.6 million or 45.5% of the Bank’s total loan portfolioconsisted of single-family residential real estate loans.  Of the $108.6 million of such loans atDecember 31, 2006, $61.0 million or 56.3% had 

7

----

adjustable rates of interest and $47.4 million or 43.7% had fixed ratesof interest.

The Bank’s ARMs typically provide for an interest rate which adjustsevery year after an initial period of three, five, seven or ten years inaccordance with a designated index (the national monthly median cost of fundsor the weekly average yield on U.S. Treasury securities adjusted to a constantcomparable maturity of one year) plus a margin. Such loans are typically based on a 30-year amortization schedule.  The amount of any increase or decrease in theinterest rate is presently limited to 2% per year, with a limit of 6% over thelife of the loan.  The Bank’sadjustable-rate loans currently being originated are not assumable.  The Bank has not engaged in the practice ofusing a cap on the payments that could allow the loan balance to increaserather 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.  AtDecember 31, 2006, the Bank held a first lien on a majority of the propertiessecuring home equity loans from the Bank. The Bank has placed an increasedemphasis on home equity loans because of their attractive yields and shorterterms to maturity.  At December 31, 2006,home equity loans and lines amounted to $28.9 million or 12.1% 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 tounderwriting guidelines adopted by the Board of Directors, the Bank will lendup to 95% of the appraised value of the property securing a single-familyresidential loan, and requires borrowers to obtain private mortgage insuranceon the portion of the principal amount of the loan that exceeds 80% of the appraisedvalue of the security property.  Inaddition, the Bank will lend up to 90% of the appraised value with no privatemortgage insurance required for home equity loans and lines.

**Multi-Family Residential and Commercial Real Estate Loans**.  The Bankoriginates and, to a lesser extent, purchases mortgage loans for theacquisition and refinancing of existing multi-family residential and commercialreal estate properties.  At December 31,2006, $2.1 million or 0.9% of the Bank’s total loan portfolio consisted ofloans secured by existing multi-family residential real estate properties and$108.3 million or 45.4% of such loan portfolio consisted of loans secured byexisting commercial real estate properties. Commercial real estate loans increased from $83.9 million or 40.4% ofthe total loan portfolio at December 31, 2001 to $108.3 million or 45.4% of thetotal loan portfolio at December 31, 2006. Such increase was due to the Bank’sstrategy to increase such lending.  TheBank intends to continue to place an increased emphasis on this type oflending.

The majority of the Bank’s multi-family residential loans are securedprimarily by five to fifteen unit apartment buildings, while the Bank’scommercial real estate loans are primarily secured by office buildings, hotels,small retail establishments, restaurants and other facilities.  These types of properties constitute themajority of the Bank’s 

8

----

commercial real estate loan portfolio. The majority of the multi-family residential and commercial real estateloan portfolio at December 31, 2006 was secured by properties located in theBank’s primary market area.  The fivelargest multi-family or commercial real estate loan relationships or loanbalances outstanding to one borrower at December 31, 2006 amounted to $6.0million, $4.7 million, $4.7 million, $4.6 million and $4.5 million,respectively, all of which were performing in accordance with their terms andwere current at such date.

Multi-family and commercial real estate loans are made onterms up to 30 years, some of which include call or balloon provisions rangingfrom five to 15 years.  The Bank willoriginate and purchase these loans either with fixed interest rates or withinterest rates which adjust in accordance with a designated index.  Loan to value ratios on the Bank’smulti-family and commercial real estate loans are typically limited to80%.  As part of the criteria forunderwriting multi-family and commercial real estate loans, the Bank generallyimposes a debt coverage ratio (the ratio of net cash from operations beforepayment of debt service to debt service) of not less than 1.1.  It is also the Bank’s general policy toobtain corporate or personal guarantees, as applicable, on its multi-familyresidential and commercial real estate loans from the principals of theborrower.

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, 2006, theBank had no non-performing multi-family or commercial real estate loans.

**Construction Loans.**  The Bank also originates residential andcommercial construction loans, and to a limited degree, land acquisition anddevelopment loans.  Construction loansare classified as either residential construction loans or commercial realestate construction loans at the time of origination, depending on the natureof the property securing the loan.  TheBank’s construction lending activities generally are limited to the Bank’sprimary market area.  At December 31,2006, construction loans amounted to $11.8 million or 5.2% of the Bank’s totalloan portfolio, which consisted of $6.7 million of residential and $5.1 millionof commercial real estate construction loans.

The Bank’s residential construction loans are primarily made to localreal estate builders and developers for the purpose of constructingsingle-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.

9

----

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, 2006, the Bank had nonon-performing construction loans.

**Consumer Loans**.  The Bank offers consumer loans in order toprovide a full range of financial services to its customers and because suchloans generally have shorter terms and higher interest rates than mortgageloans.  The consumer loans presentlyoffered by the Bank include student loans, deposit account secured loans andlines of credit.  Consumer loans amountedto $2.4 million or 1.0% of the total loan portfolio at December 31, 2006.  Student loans amounted to $1.8 million or0.8% of the total loan portfolio at December 31, 2006.  Such loans are made to local students for aterm of ten years, presently with adjustable interest rates.  The interest rate is determined by the U.S.Department of Education.  Loan repayment obligationsdo not begin until the student has completed his or her education.  The principal and interest on such loans isguaranteed by the U.S. Government.  Loanssecured by deposit accounts amounted to $561,000 or 0.3% of the total loanportfolio at December 31, 2006.  Suchloans are originated for up to 90% of the account balance, with a hold placedon the account restricting the withdrawal 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 the borrower.  The Bank believes that the generally higheryields earned on consumer loans compensate for the increased credit riskassociated with such loans and that consumer loans are important to its effortsto provide a full range of services to its customers.

**Commercial Business Loans.**  In September 1997, the Bankopened a commercial loan department to provide a full range of commercial loanproducts to small business customers in its primary marketing area.  These loans generally have shorter terms andhigher interest rates as compared to mortgage loans.  Such loans amounted to $5.5 million or 2.3%of the total loan portfolio at December 31, 2006 and were primarily secured byinventories 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, 2006.

 

10

----

 

**Loan Fee Income**.  In addition to interest earned on loans, theBank receives income from fees in connection with loan originations, loanmodifications, late payments, prepayments and for miscellaneous servicesrelated to its loans.  Income from theseactivities varies from period to period with the volume and type of loans madeand competitive conditions. The Bank charges loan origination fees which arecalculated as a percentage of the amount borrowed.  Loan origination and commitment fees and allincremental direct loan origination costs are deferred and recognized over thecontractual remaining lives of the related loans on a level yield basis.  Discounts and premiums on loans purchased areamortized in the same manner.

**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 $212,000 at December 31, 2006. Accruedinterest receivable is reported net of the allowance for uncollected interest.  Loans may be reinstated to accrual statuswhen all payments are brought current and, in the opinion of management,collection of the remaining balance can be reasonably expected.

Real estate acquired by the Bank as a result of foreclosure or by deed-in-lieuof foreclosure is classified as other real estate owned until sold and isinitially recorded at the lower of book value or fair value at the date ofacquisition.   After the date ofacquisition, all costs incurred in maintaining the property are expensed andcosts incurred for the improvement or development of such property arecapitalized up to the extent of their 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 or restructuringof a debt constitutes a troubled debt restructuring if the Bank, for economicor legal reasons related to the borrower’s financial difficulties, grants aconcession to the borrower that the Bank would not otherwise consider.  Debt restructurings or loan modifications fora borrower do not necessarily always constitute troubled debt restructurings,however, and troubled debt restructurings do not necessarily result innon-accrual loans.  The Bank did not haveany troubled debt restructurings as of December 31, 2006.

**Delinquent Loans**.  The following table sets forth informationconcerning delinquent loans at December 31, 2006, in dollar amounts and as apercentage of each category of the Bank’s loan portfolio.  The amounts presented represent the totaloutstanding principal balances of the related loans, rather than the actualpayment amounts which are past due.

 
| ** **            | ** ** | **30 — 59 Days** | ** ** | **60 — 89 Days** | ** ** | **90 or More Days** | ** ** |
|-----------------------|------------|--------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **            | ** ** | ** **                           | ** ** | **Percent**                          | ** ** | ** **                         | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **            | ** ** | ** **                           | ** ** | **of Loan**                     | ** ** | ** **                         | ** ** | **of Loan** | ** ** | ** ** | ** ** | **of Loan** | ** ** |
| ** **            | ** ** | **Amount**                           | ** ** | **Category**                         | ** ** | **Amount**                         | ** ** | **Category** | ** ** | **Amount** | ** ** | **Category** | ** ** |
| ** **            | ** ** | **(Dollars in Thousands)** | ** ** |
| Real estate:          |       |                                 |       |                                 |       |                               |       |   |   |   |   |   |   |
| Single-family         |       | $                                    | 632        |                                 | 0.61       | %                                  | $          | 549 |   | 0.53 | % | $ | 1,523 |   | 1.46 | % |
| Multi-family          |       | —                               |       | —                               |       | —                             |       | — |   | — |   | — |   |
| Commercial            |       | 388                                  |       | 0.37                                 |       | —                             |       | — |   | — |   | — |   |
| Land and construction |       | —                               |       | —                               |       | —                             |       | — |   | — |   | — |   |
| Commercial  business  |       | —                               |       | —                               |       | —                             |       | — |   | — |   | — |   |
| Consumer              |       | 23                                   |       | 0.74                                 |       | 25                                 |       | 0.81 |   | 36 |   | 1.16 |   |
|                  |       |                                 |       |                                 |       |                               |       |   |   |   |   |   |   |
| Total                 |       | $                                    | 1,043      |                                 |       |                               | $          | 574 |   |   |   | $ | 1,559 |   |   |   |

 

11

----

 

Thefollowing table sets forth the amounts and categories of the Bank’snon-performing assets at the dates indicated. The Bank did not have any troubled debt restructurings at the datesindicated.
| ** **                                                   | ** ** | **December 31,**                | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                   | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Non-accruing  loans:                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Real estate:                                                 |       |                                 |       |   |   |   |   |   |   |   |   |
| Single-family                                                |       | $                                    | 874        |   | $ | 762 |   | $ | 762 |   | $ | 1,042 |   | $ | 824 |   |
| Multi-family                                                 |       | —                               |       | — |   | — |   | — |   | — |   |
| Commercial                                                   |       | —                               |       | 222 |   | 580 |   | 2,188 |   | 3,683 |   |
| Land and construction                                        |       | —                               |       | — |   | — |   | 1,925 |   | 4,084 |   |
| Commercial business                                          |       | —                               |       | — |   | — |   | — |   | — |   |
| Consumer                                                     |       | —                               |       | — |   | — |   | — |   | — |   |
|                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Accruing loans  90 days or more delinquent:                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Real estate:                                                 |       |                                 |       |   |   |   |   |   |   |   |   |
| Single-family                                                |       | 649                                  |       | 942 |   | 603 |   | 718 |   | 585 |   |
| Multi-family                                                 |       | —                               |       | — |   | — |   | — |   | — |   |
| Commercial                                                   |       | —                               |       | — |   | — |   | — |   | — |   |
| Land and construction                                        |       | —                               |       | — |   | — |   | — |   | — |   |
| Commercial business                                          |       | —                               |       | — |   | — |   | — |   | — |   |
| Consumer                                                     |       | 36                                   |       | 14 |   | 21 |   | 18 |   | 19 |   |
| Total non-performing loans                                   |       | 1,559                                |       | 1,940 |   | 1,966 |   | 5,891 |   | 9,195 |   |
|                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Other real  estate owned:                                    |       |                                 |       |   |   |   |   |   |   |   |   |
| Real estate acquired through, or in lieu of,  foreclosure    |       | —                               |       | 1,795 |   | 3,475 |   | 2,607 |   | 1,369 |   |
| Real estate held for development                             |       | —                               |       | — |   | — |   | — |   | — |   |
| Total other real estate owned                                |       | —                               |       | 1,795 |   | 3,475 |   | 2,607 |   | 1,369 |   |
|                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Total  non-performing assets                                 |       | $                                    | 1,559      |   | $ | 3,735 |   | $ | 5,441 |   | $ | 8,498 |   | $ | 10,564 |   |
|                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Total  non-performing loans as a percentage of total loans   |       | 0.65                                 | %          | 0.85 | % | 0.92 | % | 2.77 | % | 4.77 | % |
| Total non-performing  assets as a percentage of total assets |       | 0.38                                 | %          | 0.96 | % | 1.42 | % | 2.27 | % | 2.87 | % |

 

If the Bank’s $874,000 of non-accruing loans at December 31, 2006 hadbeen current in accordance with their terms during 2006, the gross income onsuch loans would have been approximately $77,000 for 2006.  The Bank actually recorded $1,000 in interestincome on such loans for 2006.

12

----

The Bank’snonperforming assets, which consist of nonaccruing loans, accruing loans 90days or more delinquent and other real estate owned (which includes real estateacquired through, or in lieu of, foreclosure) decreased to $1.6 million or 0.4%of total assets at December 31, 2006 from $3.7 million or 1.0% of total assetsat December 31, 2005.  At December 31,2006, the Bank’s $1.6 million of nonperforming assets consisted of $685,000 ofaccruing loans 90 days or more delinquent, $874,000 of nonaccrual loans and noother real estate owned. The decrease in nonperforming assets was primarily dueto a $1.8 million decrease in other real estate owned and a $380,000 decreasein nonperforming loans.  At December 31,2006, nonperforming loans consisted of $1.5 million in single-familyresidential real estate loans and $36,000 in consumer and other loans.  The Bank’s management continues toaggressively pursue the collection and resolution of all delinquent loans.

During 2006, theBank sold two commercial real estate properties, which at December 31, 2005were recorded at $1.8 million as OREO. The larger of these two properties wassold and settled in January of 2006 and the Bank realized a gain ofapproximately $100,000. The other property was sold and settled in February of2006 and the Bank realized a loss of approximately $3,000. In June of 2006, theBank recognized an additional gain of $25,000 related to these properties.

**Classified Assets.**  Federal regulations require that each insuredsavings association classify its assets on a regular basis. In addition, inconnection with examinations of insured institutions, federal examiners haveauthority to identify 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, 2006, the Bank had $2.7 million of classified assets, ofwhich $929,000 of loans classified as special mention and $1.8 million of loanswere classified as substandard.  The$929,000 of loan classified as special mention consisted of $792,000 incommercial real estate and $137,000 in commercial business loans.  The $1.8 million of loans designated assubstandard consisted of $1.5 million of single-family real estate loans and$286,000 of commercial real estate loans.

**Allowance for Loan Losses**.  The allowance for loanlosses is increased 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.

Although management uses the best information available to makedeterminations with respect to the provisions for loan losses, additionalprovisions for loan losses may be required to be established in the futureshould economic or other conditions change substantially.  In addition, the Pennsylvania Department of Bankingand the FDIC, as an 

13

----

integral part of their examination process, periodically review the Bank’sallowance for loan losses.  Such agenciesmay require 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 the allowance for loan lossesand other selected statistics for the periods presented.
| ** **                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                               | ** ** | **(Dollars in Thousands)**       | ** ** |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |
| Average loans  receivable, net (1)                       |       | $                                          | 232,520    |   | $ | 218,036 |   | $ | 211,278 |   | $ | 196,505 |   | $ | 195,851 |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |
| Allowance for  loan losses, beginning of year            |       | $                                          | 2,671      |   | $ | 2,608 |   | $ | 2,740 |   | $ | 3,347 |   | $ | 2,903 |   |
| Net charge-offs                                          |       | (11                                        | )          | (57 | ) | (342 | ) | (1,087 | ) | (1,516 | ) |
| Provision for  loan losses                               |       | 60                                         |       | 120 |   | 210 |   | 480 |   | 1,960 |   |
| Allowance for  loan losses, end of year                  |       | $                                          | 2,720      |   | $ | 2,671 |   | $ | 2,608 |   | $ | 2,740 |   | $ | 3,347 |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |
| Net charge-offs  to average loans receivable, net        |       | 0.01                                       | %          | 0.03 | % | 0.16 | % | 0.55 | % | 0.77 | % |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |
| Allowance for  loan losses to total loans receivable     |       | 1.14                                       | %          | 1.18 | % | 1.22 | % | 1.29 | % | 1.73 | % |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |
| Allowance for  loan losses to total non-performing loans |       | 174.39                                     | %          | 137.63 | % | 132.65 | % | 46.51 | % | 36.40 | % |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |
| Net charge-offs to  allowance for loan losses            |       | 0.40                                       | %          | 2.13 | % | 13.11 | % | 39.67 | % | 45.29 | % |

----

(1)             Includesmortgage loans 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,**                | ** ** |
|----------------------------|------------|--------------------------------------|------------|
| ** **                 | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                 | ** ** | **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 |       | $                                    | 445        |   | 16.35 | % | $ | 462 |   | 17.30 | % | $ | 382 |   | 41.74 | % | $ | 348 |   | 40.80 | % | $ | 338 |   | 36.16 | % |
| Multi-family residential   |       | 25                                   |       | 0.90 |   | 28 |   | 1.04 |   | 30 |   | 1.17 |   | 26 |   | 1.19 |   | 31 |   | 1.61 |   |
| Commercial real estate     |       | 1,691                                |       | 62.17 |   | 1,698 |   | 63.60 |   | 1,706 |   | 48.45 |   | 1,616 |   | 49.31 |   | 1,812 |   | 51.76 |   |
| Land and construction      |       | 416                                  |       | 15.30 |   | 322 |   | 12.07 |   | 332 |   | 4.25 |   | 618 |   | 4.30 |   | 1,068 |   | 6.46 |   |
| Consumer                   |       | 9                                    |       | 0.34 |   | 12 |   | 0.43 |   | 12 |   | 1.70 |   | 11 |   | 1.77 |   | 11 |   | 1.97 |   |
| Commercial business        |       | 133                                  |       | 4.94 |   | 149 |   | 5.56 |   | 146 |   | 2.69 |   | 121 |   | 2.63 |   | 87 |   | 2.04 |   |
| Total                      |       | $                                    | 2,719      |   | 100.00 | % | $ | 2,671 |   | 100.00 | % | $ | 2,608 |   | 100.00 | % | $ | 2,740 |   | 100.00 | % | $ | 3,347 |   | 100.00 | % |

 

15

----

**Investment Activities**

**Mortgage-Backed Securities.**  Mortgage-backed securities(which also are known as mortgage participation certificates or pass-throughcertificates) represent a participation interest in a pool of single-family ormulti-family mortgages, the principal and interest payments on which are passedfrom the mortgage originators, through intermediaries (generally U.S.Government agencies and government sponsored enterprises) that pool andrepackage the participation interests in the form of securities, to investorssuch as the Bank.  Such U.S. Governmentagencies and government sponsored enterprises, which guarantee the payment ofprincipal and interest to investors, primarily include the FHLMC, the FNMA andthe Government National Mortgage 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’smortgage-backed securities portfolio designated as available for sale at thedates indicated.

|                                   | ** ** | **December 31,**   | ** ** |
|-----------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                        | ** ** | **(In Thousands)** | ** ** |
|                              |       |                    |       |   |   |   |   |
| Mortgage-backed  securities:      |       |                    |       |   |   |   |   |
| FNMA                              |       | $                       | 26,045     |   | $ | 28,077 |   | $ | 15,545 |   |
| FHLMC                             |       | 13,191                  |       | 14,913 |   | 11,826 |   |
| GNMA                              |       | 4,401                   |       | 5,372 |   | 4,126 |   |
|                              |       |                    |       |   |   |   |   |
| Total mortgage-backed  securities |       | $                       | 43,636     | (1) | $ | 48,362 |   | $ | 31,497 |   |

----

(1)             AtDecember 31, 2006, gross unrealized gains on such securities amounted to$44,000 and gross unrealized losses amounted to $965,000.

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,** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                            | ** ** | **(In Thousands)**                    | ** ** |
|                                  |       |                                       |       |   |   |   |   |
| Mortgage-backed  securities purchased |       | $                                          | 6,451      |   | $ | 26,716 |   | $ | 13,727 |   |
| Mortgage-backed  securities sold      |       | —                                     |       | — |   | — |   |
| Principal  repayments                 |       | (11,412                                    | )          | (8,920 | ) | (6,942 | ) |
| Other, net                            |       | 235                                        |       | (931 | ) | (305 | ) |
| Net (decrease) increase               |       | $                                          | (4,726     | ) | $ | 16,865 |   | $ | 6,479 |   |

 

Mortgage-backed securities generally increase the quality of the Bank’sassets by virtue of the insurance or guarantees that back them, are more liquidthan individual mortgage loans and may be used to collateralize borrowings orother obligations of the Bank.  During2005, the Bank reduced its investments in U.S. Government and Agency securitiesand reinvested these funds primarily into 10 year mortgage-backed securities toimprove cash flows.  At December 31,2006, $2.9 million or 6.7% of the Bank’s mortgage-backed securities were pledgedto secure various obligations of the Bank. See Note 4 to the Consolidated Financial Statements.

Information regarding the contractual maturities and weighted averageyield of the Bank’s mortgage-backed securities portfolio at December 31, 2006is presented below.
| ** **             | ** ** | **December 31, 2006**      | ** ** |
|------------------------|------------|--------------------------------------|------------|
| ** **             | ** ** | **One Year  or Less**      | ** ** | **After One  to Five Years** | ** ** | **After Five  to 15 Years** | ** ** | **Over 15  Years** | ** ** | **Total** | ** ** |
| ** **             | ** ** | **(Dollars in Thousands)** | ** ** |
|                   |       |                                 |       |   |   |   |   |   |   |   |   |
| FHLMC securities       |       | $                                    | —     |   | $ | 25 |   | $ | 12,662 |   | $ | 503 |   | $ | 13,190 |   |
| FNMA securities        |       | —                               |       | 1,229 |   | 21,203 |   | 3,613 |   | 26,045 |   |
| GNMA securities        |       | —                               |       | 6 |   | — |   | 4,395 |   | 4,401 |   |
| CMOs                   |       | —                               |       | — |   | — |   | — |   | — |   |
| Total                  |       | $                                    | —     |   | $ | 1,260 |   | $ | 33,865 |   | $ | 8,511 |   | $ | 43,636 | (1) |
|                   |       |                                 |       |   |   |   |   |   |   |   |   |
| Weighted average yield |       | —                               | %          | 4.43 | % | 4.66 | % | 4.56 | % | 4.65 | % |

----

(1)             Allmortgage-backed securities were designated as available for sale.

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 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

17

----

offered for mortgage loans, refinancing generally increases andaccelerates the prepayment of the underlying mortgages and the relatedsecurity.  Under such circumstances, theBank may be subject 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 theBank, as established by the Board of Directors, is designed primarily toprovide and maintain liquidity and to generate a favorable return oninvestments without incurring undue interest rate risk, credit risk, and investmentportfolio asset concentrations.  The Bank’sinvestment policy takes into account the Bank’s business plan, interest ratemanagement, the current economic environment, the types of securities to beheld and other safety and soundness considerations.  The Bank’s investment policy is currentlyimplemented by the Chief Operating Officer and reviewed and evaluated by theAsset Liability Committee.  The AssetLiability Committee is required to issue a written compliance report to theBoard of Directors at least quarterly.

The Bank is authorized to invest in obligations issued or fullyguaranteed by the U.S. Government, certain federal agency obligations, insuredmunicipal obligations, certain mutual funds, investment grade corporate debtsecurities and other specified investments. At December 31, 2005, the Bank’s investment securities amounted to $59.3million, of which $35.1 million was designated as available for sale and $24.3million was designated as held to maturity. The Bank has designated the majority of its investment securities asavailable for sale in order to respond to changes in market rates, increases inloan demand, and changes in liquidity needs.

18

----

The following table sets forth certain information relating to the Bank’sinvestment securities portfolio at the dates indicated.
| ** **                             | ** ** | **December 31,**   | ** ** |
|----------------------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                             | ** ** | **Carrying  Value**     | ** ** | **Fair  Value** | ** ** | **Carrying  Value** | ** ** | **Fair  Value** | ** ** | **Carrying  Value** | ** ** | **Fair  Value** | ** ** |
| ** **                             | ** ** | **(In Thousands)** | ** ** |
| U.S. Government  and agency securities |       | $                       | 15,858     |   | $ | 15,858 |   | $ | 24,654 |   | $ | 24,654 |   | $ | 46,559 |   | $ | 46,559 |   |
| Municipal  obligations                 |       | 24,251                  |       | 24,889 |   | 28,181 |   | 28,978 |   | 27,743 |   | 28,545 |   |
| Mutual funds                           |       | 19,195                  |       | 19,195 |   | 19,244 |   | 19,244 |   | 19,595 |   | 19,595 |   |
| Total                                  |       | $                  | 59,304     | (1) | $ | 59,942 | (1) | $ | 72,079 |   | $ | 72,876 |   | $ | 93,897 |   | $ | 94,699 |   |

----

(1)             AtDecember 31, 2006, investment securities totaling $35.1 million were designatedas available for sale. At December 31, 2006, gross unrealized lossesamounted to $946,000 and there were $8,000 in gross unrealized gains. AtDecember 31, 2006, $4.7 million or 12.1% of the Bank’s investmentsecurities were pledged to secure various obligations of the Bank. See Note 3to the Consolidated Financial Statements.

Information regarding the contractual maturities and weighted averageyield of the Bank’s investment securities portfolio at December 31, 2006 ispresented below.  Actual maturities maydiffer from contractual maturities because issuers may have the right to callor prepay obligations with or without call or prepayment penalties.
| ** **                             | ** ** | **At December 31, 2006** | ** ** |
|----------------------------------------|------------|-----------------------------------------|------------|
| ** **                             | ** ** | **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 |       | $                                       | 1,988      |   | $ | 12,884 |   | $ | 986 |   | $ | — |   | $  | 15,858 | (1) |
| Municipal  obligations                 |       | —                                  |       | 340 |   | 3,602 |   | 20,309 |   | 24,251 | (2) |
| Mutual funds                           |       | 19,195                                  |       | — |   | — |   | — |   | 19,195 | (3) |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |
| **Total**                              |       | $                                       | 21,183     |   | $ | 13,224 |   | $ | 4,588 |   | $ | 20,309 |   | $ | 59,304 |   |
| Weighted average yield                 |       | 5.04                                    | %          | 4.23 | % | 4.06 | % | 4.76 | % | 4.58 | % |

----

(1)             The$15.9 million of U.S. Government agency securities are designated as availablefor sale.

(2)             The$24.3 million of municipal obligations are designated as held to maturity.

(3)             The$19.2 million of mutual funds is designated as available for sale.

19

----

**Sources of Funds**

**General**.  Deposits are the primary source of the Bank’sfunds for lending and other investment purposes.  In addition to deposits, the Bank derivesfunds from loan principal repayments, prepayments and advances from the FederalHome Loan Bank (“FHLB”) of Pittsburgh. Loan repayments are a relatively stable source of funds, while depositinflows and outflows are significantly influenced by general interest rates andmoney market conditions.  Borrowings maybe used on a short-term basis to compensate for reductions in the availabilityof funds from other sources.  They mayalso be used on a longer term basis for general business purposes.

**Deposits**.  The Bank’s deposit products include a broadselection of deposit instruments, including NOW accounts, money marketaccounts, regular savings accounts and term certificate accounts.  Deposit account terms vary, with theprincipal difference being the minimum balance required, the time periods thefunds 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, Concordville, Havertown, Springfield,Lansdown, Paoli, and Secane offices.  TheBank utilizes traditional marketing methods to attract new customers andsavings deposits, 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, 2006.

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.

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,**                | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|
| ** **                               | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                               | ** ** | **Amount**                           | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                               | ** ** | **(Dollars in Thousands)** | ** ** |
|                                     |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Passbook and  statement savings accounts |       | $                                    | 43,512     |   | 13.04 | % | $ | 54,869 |   | 18.43 | % | $ | 62,680 |   | 21.85 | % |
| Money market  accounts                   |       | 24,255                               |       | 7.27 |   | 23,837 |   | 8.01 |   | 26,978 |   | 9.40 |   |
| Certificates of  deposit                 |       | 200,228                              |       | 59.98 |   | 167,580 |   | 56.29 |   | 155,630 |   | 54.25 |   |
| NOW and Super  NOW accounts              |       | 43,859                               |       | 13.13 |   | 33,335 |   | 11.19 |   | 25,595 |   | 8.92 |   |
| Non-interest  bearing accounts           |       | 21,948                               |       | 6.58 |   | 18,089 |   | 6.08 |   | 16,023 |   | 5.58 |   |
| Total deposits  at end of year           |       | $                                    | 333,802    |   | 100.00 | % | $ | 297,710 |   | 100.00 | % | $ | 286,906 |   | 100.00 | % |

 

20

----

 

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

|                                    | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                         | ** ** | **(In Thousands)**                    | ** ** |
|                               |       |                                       |       |   |   |   |   |
| Increase before  interest credited |       | $                                          | 28,552     |   | $ | 5,138 |   | $ | 7,930 |   |
| Interest credited                  |       | 8,350                                      |       | 5,666 |   | 4,357 |   |
| Net savings increase               |       | $                                          | 36,902     |   | $ | 10,804 |   | $ | 12,287 |   |

 

The following table sets forth maturities of the Bank’s certificates ofdeposit of $100,000 or more at December 31, 2006 by time remaining to maturity.

|                                      | ** ** | **Amounts in   Thousands** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
|                                 |       |                                 |       |
| Three months or less                 |       | $                                    | 6,247      |   |
| Over three months  through 12 months |       | 24,728                               |       |
| Over 12 months                       |       | 3,592                                |       |
| Total                                |       | $                                    | 34,621     |   |

 

The followingtable presents the average balance of each deposit type and the average ratepaid on each deposit type for the periods indicated.
| ** **                               | ** ** | **December 31,**                | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|
| ** **                               | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                               | ** ** | **Average  Balance**                 | ** ** | **Average  Rate  Paid** | ** ** | **Average  Balance** | ** ** | **Average  Rate  Paid** | ** ** | **Average  Balance** | ** ** | **Average  Rate  Paid** | ** ** |
| ** **                               | ** ** | **(Dollars in Thousands)** | ** ** |
|                                     |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Passbook and statement  savings accounts |       | $                                    | 49,215     |   | .75 | % | $ | 59,020 |   | .75 | % | $ | 64,078 |   | .75 | % |
| Money market accounts                    |       | 23,158                               |       | 1.67 |   | 25,425 |   | 1.01 |   | 27,009 |   | .81 |   |
| Certificates of deposit                  |       | 173,547                              |       | 3.90 |   | 157,738 |   | 2.87 |   | 151,665 |   | 2.37 |   |
| NOW and Super NOW                        |       | 39,848                               |       | 2.05 |   | 35,324 |   | 1.24 |   | 22,889 |   | .31 |   |
| Non-interest bearing  accounts           |       | 17,699                               |       | — |   | 17,291 |   | — |   | 16,883 |   | — |   |
| Total average deposits                   |       | $                                    | 303,467    |   | 2.92 | % | $ | 294,798 |   | 2.04 | % | $ | 282,524 |   | 1.64 | % |

 

21

----

The following table presents, by various interest ratecategories, the amount of certificates of deposit at December 31, 2006 and 2005and the amounts at December 31, 2006, which mature during the periodsindicated.
| ** **                            | ** ** | **December 31,**   | ** ** | **Amounts at December 31, 2006  Maturing Within** | ** ** |
|---------------------------------------|------------|-------------------------|------------|----------------------------------------------------------------------------|------------|
| **Certificates of Deposit** | ** ** | **2006**                | ** ** | **2005**                                                                   | ** ** | **One  Year** | ** ** | **Two  Years** | ** ** | **Three  Years** | ** ** | **Thereafter** | ** ** |
| ** **                            | ** ** | **(In Thousands)** | ** ** |
|                                  |       |                    |       |                                                                       |       |   |   |   |   |   |   |   |   |
| 2.0% or less                          |       | $                       | 192        |                                                                       | $          | 338 |   | $ | 192 |   | $ | — |   | $ | — |   | $ | — |   |
| 2.01% to 4.0%                         |       | 32,874                  |       | 91,272                                                                     |       | 21,558 |   | 8,616 |   | 1,504 |   | 1,196 |   |
| 4.01% to 6.0%                         |       | 167,162                 |       | 75,377                                                                     |       | 154,353 |   | 2,392 |   | 2,580 |   | 7,837 |   |
| 6.01% to 8.0%                         |       | —                  |       | 593                                                                        |       | — |   | — |   | — |   | — |   |
| Total certificates of deposit         |       | $                       | 200,228    |                                                                       | $          | 167,580 |   | $ | 176,103 |   | $ | 11,008 |   | $ | 4,084 |   | $ | 9,033 |   |

 

**Borrowings**.  The Bank may obtain advances from the FHLB ofPittsburgh upon the security of the common stock it owns in that bank andcertain of its loans, provided certain standards related to creditworthinesshave been met. Such advances are made pursuant to several credit programs, eachof which has its own interest rate and range of maturities.  Such advances are generally available to meetseasonal and other withdrawals of deposit accounts and to permit increasedlending.  At December 31, 2006, the Bankhad $37.2 million of advances from the FHLB of Pittsburgh.  Of the $37.2 million of FHLB advances atDecember 31, 2006, $172,000 is due in 2007, $5.0 million is due in 2008, $5.0million 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, 2006.

The followingtable sets forth certain information regarding borrowed funds at or for thedates indicated:
| ** **                                                   | ** ** | **At or for the Year Ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                   | ** ** | **(Dollars in Thousands)**                                         | ** ** |
|                                                         |       |                                                                         |       |   |   |   |   |
| FHLB of Pittsburgh advances:                                 |       |                                                                         |       |   |   |   |   |
| Average balance  outstanding                                 |       | $                                                                            | 47,684     |   | $ | 52,823 |   | $ | 58,697 |   |
| Maximum amount  outstanding at any month-end during the year |       | 52,182                                                                       |       | 56,192 |   | 61,201 |   |
| Balance  outstanding at end of year                          |       | 37,173                                                                       |       | 52,182 |   | 56,192 |   |
| Weighted average  interest rate during the year              |       | 6.21                                                                         | %          | 6.12 | % | 5.86 | % |
| Weighted average  interest rate at end of period             |       | 6.30                                                                         | %          | 6.10 | % | 5.85 | % |
| Total borrowings:                                            |       |                                                                         |       |   |   |   |   |
| Average balance  outstanding                                 |       | $                                                                            | 47,990     |   | $ | 53,116 |   | $ | 59,326 |   |
| Maximum amount  outstanding at any month-end during the year |       | 52,639                                                                       |       | 56,464 |   | 61,781 |   |
| Balance  outstanding at end of year                          |       | 37,210                                                                       |       | 53,116 |   | 56,317 |   |
| Weighted average  interest rate during the year              |       | 6.21                                                                         | %          | 6.10 | % | 5.84 | % |
| Weighted average  interest rate at end of year               |       | 6.29                                                                         | %          | 6.08 | % | 5.83 | % |

 

22

----

**Employees**

The Bank had 67full-time employees and 25 part-time employees at December 31, 2006.  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 thesubsidiary.  Alliance Delaware Corp.currently manages certain investments for the Bank, which, as of December 31,2006, amounted to $51.8 million. Alliance Financial and Investment Services LLC was established in 2003to share in commission fees from 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.

**REGULATION**

**General.**  Alliance Bancorp and Alliance Mutual HoldingCompany, as federally-chartered savings and loan holding companies, arerequired to file certain reports with, and are subject to examination by, andotherwise must comply with the rules and regulations of the Office of ThriftSupervision. Alliance Bancorp is also subject to the rules and regulations ofthe Securities 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 Reserve Board.  The federal and state laws and regulationswhich are applicable to banks regulate, among other things, the scope of theirbusiness, their investments, their reserves against deposits, the timing of theavailability of deposited funds and the nature and amount of and collateral forcertain loans.  There are periodicexaminations by the Pennsylvania Department of Banking and the FDIC to testAlliance Bank’s compliance with various regulatory requirements.  This regulation and supervision establishes acomprehensive framework of activities in which an institution can engage and isintended 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.

23

----

Certain of thestatutory and regulatory requirements that are applicable to Alliance Bank andAlliance Bancorp 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.

**Regulationof Alliance Bank**

**PennsylvaniaBanking Law.**  ThePennsylvania Banking Code of 1965 (the “Banking Code”) contains detailedprovisions 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 thepurposes of the Banking Code is to provide savings banks with the opportunityto be competitive with each other and with other financial institutionsexisting under other Pennsylvania laws and other state, federal and foreignlaws.  A Pennsylvania savings bank maylocate or change the location of its principal place of business and establishan office anywhere in the Commonwealth, with the prior approval of theDepartment.

The Departmentgenerally examines each savings bank not less frequently than once every twoyears.  Although the Department mayaccept the examinations and reports of the FDIC in lieu of its own examination,the present practice is for the Department to conduct individualexaminations.  The Department may orderany savings bank to discontinue any violation of law or unsafe or unsoundbusiness practice and may direct any trustee, officer, attorney or employee ofa savings bank engaged in an objectionable activity, after the Department hasordered the activity to be terminated, to show cause at a hearing before theDepartment why such person should not be removed.

**Insurance of 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-insured institution is assignedto one of three capital groups which are based solely on the level of aninstitution’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 zeroassessment rate.

In addition, all institutions with depositsinsured by the FDIC are required to pay assessments to fund interest paymentson bonds issued by the Financing Corporation, a mixed-ownership governmentcorporation established to recapitalize the predecessor to the SavingsAssociation Insurance Fund.  Theassessment rate for the third quarterof 2006 was 0.0126% of insured deposits and is adjusted quarterly.  These assessments will continue until theFinancing Corporation bonds mature in 2019.

The FDIC may terminate the depositinsurance of any insured depository institution, including Alliance Bank, if itdetermines after a hearing that the institution has engaged or is engaging inunsafe or unsound practices, is in an unsafe or unsound condition to continueoperations, or has violated any applicable law, regulation, order or anycondition 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. Bushsigned into law legislation that merged the Bank Insurance Fund and the SavingsAssociation Insurance Fund to form the Deposit Insurance Fund, eliminated anydisparities in bank and thrift risk-based premium assessments, reduced theadministrative burden of maintaining and operating two separate funds andestablished certain new insurance coverage limits and a mechanism for possibleperiodic increases.  The legislation alsogave the FDIC greater discretion to identify the relative risks allinstitutions present to the Deposit Insurance Fund and set risk-based premiums.

24

----

Major provisions in the legislationinclude:

·                                          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 future premiumswith certain limitations; and

·                                          requiringthe payment of dividends of 100% of the amount that the insurance fund exceeds1.5% of the estimated insured deposits and the payment of 50% of the amount thatthe insurance fund exceeds 1.35% of the estimated insured deposits (when thereserve is greater than 1.35% but no more than 1.5%).

Pursuant to theReform Act, the FDIC has determined to maintain the designated reserve ratio atits current 1.25%, which will be reviewed annually.  The FDIC has also adopted a new risk-basedpremium system that provides for quarterly assessments based on an insuredinstitution’s ranking in one of four risk categories based upon supervisory andcapital evaluations. Beginning in 2007, well-capitalized institutions(generally those with CAMELS composite ratings of 1 or 2) will be grouped inRisk Category I and will be assessed for deposit insurance at an annual rate ofbetween five and seven basis points.  Theassessment rate for an individual institution is determined according to aformula based on a weighted average of the institution’s individual CAMELcomponent ratings plus either five financial ratios or, in the case of aninstitution with assets of $10.0 billion or more, the average ratings of itslong-term debt.  Institutions in RiskCategories II, III and IV will be assessed at annual rates of 10, 28 and 43basis points, respectively.  The Bank anticipatesthat it will be able to offset its deposit insurance premium for 2007 with thespecial assessment credit.

**CapitalRequirements.**  The FDIChas promulgated regulations and adopted a statement of policy regarding thecapital adequacy of state-chartered banks which, like Alliance Bank, are notmembers of the Federal Reserve System. These requirements are substantially similar to those adopted by theFederal 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 servicing rights.

The FDIC alsorequires that 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 isalso subject 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 31,2006, Alliance Bank’s capital ratios exceeded each of its capital requirements.

25

----

 

**Activitiesand Investments of Insured State-Chartered Banks.**  The activities and equity investments ofFDIC-insured, state-chartered banks are generally limited to those that arepermissible for national banks.  Underregulations dealing with equity investments, an insured state bank generallymay not directly or indirectly acquire or retain any equity investment of atype, or in an amount, that is not permissible for a national bank.  An insured state bank is not prohibited from,among other things:

·                                          acquiringor retaining a majority interest in a subsidiary;

·                                          investingas a limited partner in a partnership the sole purpose of which is direct orindirect investment in the acquisition, rehabilitation or new construction of aqualified housing project, provided that such limited partnership investmentsmay not exceed 2% of the bank’s total assets;

·                                          acquiringup to 10% of the voting stock of a company that solely provides or reinsuresdirectors’, trustees’ and officers’ liability insurance coverage or bankers’blanket bond group insurance coverage for insured depository institutions; and

·                                          acquiringor retaining the voting shares of a depository institution if certainrequirements are met.

The FDIC hasadopted regulations pertaining to the other activity restrictions imposed uponinsured state 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.

**Restrictionson Capital Distributions.** Office of Thrift Supervision regulations govern capital distributions bysavings institutions, which include cash dividends, stock repurchases and othertransactions charged to the capital account of a savings institution to makecapital distributions.  These regulationsapply 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:

·                                          thetotal capital distributions for the applicable calendar year exceed the sum ofthe institution’s net income for that year to date plus the institution’sretained net income for the preceding two years;

·                                          theinstitution would not be at least adequately capitalized following thedistribution;

·                                          thedistribution would violate any applicable statute, regulation, agreement orOffice of Thrift Supervision-imposed condition; or

·                                          theinstitution is not eligible for expedited treatment of its filings with theOffice of Thrift Supervision.

If an application is not required to be filed, savingsinstitutions such as Alliance Bank which are a subsidiary of a holding company(as well as certain other institutions) must still file a notice with theOffice of Thrift Supervision at least 30 days before the board of directorsdeclares a dividend or approves a capital distribution.

An institutionthat either before or after a proposed capital distribution fails to meet itsthen applicable minimum capital requirement or that has been notified that itneeds more than normal supervision may not make any capital distributionswithout the prior 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 prohibitsan insured 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.

26

----

**PrivacyRequirements of the Gramm-Leach-Bliley Act.**  The Gramm-Leach-Bliley Act of 1999 providedfor sweeping financial modernization for commercial banks, savings banks,securities firms, insurance companies, and other financial institutions operatingin the United States.  Among otherprovisions, the Gramm-Leach-Bliley Act places limitations on the sharing ofconsumer financial information with unaffiliated third parties.  Specifically, the Gramm-Leach-Bliley Actrequires all financial institutions offering financial products or services toretail customers to provide such customers with the financial institution’sprivacy policy and provide such customers the opportunity to “opt out” of thesharing of personal financial information with unaffiliated third parties.  Alliance Bank currently has a privacyprotection policy in place and believes such policy is in compliance with theregulations.

**Anti-MoneyLaundering.**  On October26, 2001, in response to the events of September 11, 2001, the President of theUnited States signed into law the Uniting and Strengthening America byProviding Appropriate Tools Required to Intercept and Obstruct Terrorism Act of2001 (referred to as the USA PATRIOT Act). The USA PATRIOT Act significantly expands the responsibilities offinancial institutions, including savings and loan associations, in preventingthe use of the U.S. financial system to fund terrorist activities.  Title III of the USA PATRIOT Act provides fora significant overhaul of the U.S. anti-money laundering regime.  Among other provisions, it requires financialinstitutions operating in the United States to develop new anti-moneylaundering compliance programs, due diligence policies and controls to ensurethe detection and reporting of money laundering. Such compliance programs areintended to supplement existing compliance requirements, also applicable tofinancial institutions, under the Bank Secrecy Act and the Office of ForeignAssets Control Regulations.  AllianceBank has established policies and procedures to ensure compliance with the USAPATRIOT Act’s provisions.

**RegulatoryEnforcement 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.

**Regulationof Alliance Bancorp and 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 Home Owners’ LoanAct to be treated as a “savings association” for purposes of Section 10 of theHome Owners’ Loan Act.  As a result,Alliance Bancorp and Alliance Mutual Holding Company registered with the Officeof Thrift Supervision and are subject to Office of Thrift Supervisionregulations, examinations, supervision and reporting requirements relating tosavings and loan holding companies.  As asubsidiary of a savings and loan holding company, Alliance Bank is subject tocertain restrictions in its dealings with Alliance Bancorp and Alliance MutualHolding Company and affiliates thereof.

**RestrictionsApplicable to Alliance Bancorp and Alliance Mutual Holding Company.**  Because Alliance Bancorp and Alliance MutualHolding Company operate under federal charters issued by the Office of ThriftSupervision under Section 10(o) of the Home Owners’ Loan Act, they are permittedto engage only in the following activities:

·                                          investingin the stock of a savings institution;

·                                          acquiringa mutual association through the merger of such association into a savingsinstitution subsidiary of such holding company or an interim savings institutionsubsidiary of such holding company;

·                                          mergingwith or acquiring another holding company, one of whose subsidiaries is asavings institution;

·                                          investingin a corporation the capital stock of which is available for purchase by asavings institution under federal law or under the law of any state where thesubsidiary savings institution or association is located; and

·                                          thepermissible activities described below for non-grandfathered savings and loanholding companies.

Activities whichare permissible for non-grandfathered savings and loan holding companiesinclude:

·                                          furnishingor performing management services for a subsidiary savings institution;

27

----

 

·                                          conductingan insurance agency or escrow business;

·                                          holding,managing, or liquidating assets owned or acquired from a subsidiary savingsinstitution;

·                                          holdingor managing properties used or occupied by a subsidiary savings institution;

·                                          actingas trustee under a deed of trust;

·                                          anyother activity (i) that the Federal Reserve Board, by regulation, hasdetermined to be permissible for bank holding companies under Section 4(c) ofthe Bank Holding Company Act of 1956, unless the Director of the Office ofThrift Supervision, by regulation, prohibits or limits any such activity forsavings and loan holding companies, or (ii) in which multiple savings and loanholding companies were authorized by regulation to directly engage in on March5, 1987;

·                                          purchasing,holding, or disposing of stock acquired in connection with a qualified stockissuance if the purchase of such stock by such holding company is approved bythe Director of the Office of Thrift Supervision; and

·                                          anyactivity permissible for financial holding companies under section 4(k) of theBank Holding Company Act.

Permissibleactivities which are deemed to be financial in nature or incidental theretounder section 4(k) of the Bank Holding Company Act include:

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

·                                          insuranceactivities or providing and issuing annuities, and acting as principal, agent,or broker;

·                                          financial,investment, or economic advisory services;

·                                          issuingor selling instruments representing interests in pools of assets that a bank ispermitted to hold directly;

·                                          underwriting,dealing in, or making a market in securities;

·                                          activitiespreviously determined by the Federal Reserve Board to be closely related tobanking;

·                                          activitiesthat bank holding companies are permitted to engage in outside of the U.S.; and

·                                          portfolioinvestments made by an insurance company.

In addition,Alliance Bancorp is not permitted to be acquired unless the acquirer is engagedsolely in financial activities or to acquire a company unless the company isengaged solely in financial activities.

If a mutualholding company or a mutual holding company subsidiary holding company acquiresor merges with another holding company, the holding company acquired or theholding company resulting from such merger or acquisition may only invest inassets and engage in the activities listed above, and it has a period of twoyears to cease 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.

Ifthe subsidiary savings institution fails to meet the Qualified Thrift Lendertest set forth in Section 10(m) of the Home Owners’ Loan Act, as discussedbelow, then the savings and loan holding company must register with the FederalReserve Board as a bank holding company, unless the savings institutionrequalifies as a Qualified Thrift Lender within one year thereafter.

**Qualified Thrift Lender Test.**  Under Section 2303 of the Economic Growth andRegulatory Paperwork Reduction Act of 1996, a savings association can complywith the Qualified Thrift Lender test by either meeting the Qualified ThriftLender test set forth in the Home Owners’ Loan Act and implementing regulationsor qualifying as a domestic building and loan association as defined in Section7701(a)(19) of the Internal Revenue Code of 1986, as amended.  A savings bank subsidiary of a savings andloan holding company that does not comply with the Qualified Thrift Lender testmust comply with the following restrictions on its operations:

28

----

 

·                                          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 regarding paymentof dividends by a national bank.

Uponthe expiration of three years from the date the institution ceases to meet theQualified Thrift Lender test, it must cease any activity and not retain anyinvestment not permissible for a national bank (subject to safety and soundnessconsiderations).

AllianceBank believes that it meets the provisions of the Qualified Thrift Lender test.

**Limitationson Transactions with Affiliates.**  Transactions between savings institutions andany affiliate are governed by Sections 23A and 23B of the Federal ReserveAct.  An affiliate of a savingsinstitution is any company or entity which controls, is controlled by or isunder 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, Section23A limits 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.  Section23B applies 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 include theprovision 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 or similarobligations of any affiliate, except for affiliates which are subsidiaries ofthe savings institution.

Inaddition, Sections 22(g) and (h) of the Federal Reserve Act place restrictionson loans to executive officers, directors and principal stockholders.  Under Section 22(h), loans to a director, anexecutive officer and to a greater than 10% stockholder of a savings institution,and certain affiliated interests of either, may not exceed, together with allother outstanding 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, executive officersand principal stockholders be made on terms substantially the same as offeredin comparable transactions to other persons unless the loans are made pursuantto a benefit or compensation program that (i) is widely available to employeesof the institution and (ii) does not give preference to any director, executiveofficer or principal stockholder, or certain affiliated interests of either,over other employees of the savings institution.  Section 22(h) also requires prior boardapproval for certain loans.  In addition,the aggregate amount of extensions of credit by a savings institution to allinsiders cannot exceed the institution’s unimpaired capital and surplus.  Furthermore, Section 22(g) places additionalrestrictions on loans to executive officers. At December 31, 2006, Alliance Bank was in compliance with the aboverestrictions.

**Restrictions on Acquisitions.**  Except under limited circumstances, savingsand loan holding companies are prohibited from acquiring, without priorapproval of the Director of the Office of Thrift Supervision, (i) control ofany other savings institution or savings and loan holding company orsubstantially all the assets thereof or (ii) more than 5% of the voting sharesof a savings institution or holding company thereof which is not asubsidiary.  Except with the priorapproval of the Director, no director or officer of a savings and loan holdingcompany or person owning or controlling by proxy or otherwise more than 25% ofsuch company’s stock, may acquire control of any savings institution, otherthan a subsidiary savings institution, or of any other savings and loan holdingcompany.

TheDirector of the Office of Thrift Supervision may only approve acquisitionsresulting in the formation of a multiple savings and loan holding company whichcontrols savings institutions in more than one state if (i) the multiplesavings and loan holding company involved controls a savings institution whichoperated a home or branch office located in the state of the institution to beacquired as of March 5, 1987; (ii) the acquiror is authorized to acquirecontrol of the savings institution pursuant to the emergency acquisitionprovisions of the Federal Deposit Insurance Act ; or (iii) the statutes of thestate in which the institution to be acquired is located 

29

----

specificallypermit institutions to be acquired by the state-chartered institutions orsavings and loan holding companies located in the state where the acquiringentity is located (or by a holding company that controls such state-charteredsavings institutions).

**Waiversof Dividends by Alliance Mutual Holding Company**.  It is the policy of a number of mutualholding 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 Companyanticipates that Alliance Mutual Holding Company will waive dividends paid bythem.  Under Office of Thrift Supervisionregulations, public stockholders are not diluted because any dividends waivedby a mutual holding company are not considered in determining an appropriateexchange ratio in the event the mutual holding company converts to stock form.

A conditionimposed on Alliance Bank by the FDIC in connection with its formation of amutual holding company required that (1) any dividends waived by the mutualholding company must be retained by the Bank and segregated, earmarked, orotherwise identified on the books and records, and (2) that in the event of aconversion of the mutual holding company to stock form the amount of waived dividendsmust be taken into account in any valuation of the Bank and mutual holdingcompany and factored into the calculation used in establishing a fair andreasonable 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.

**TheSarbanes-Oxley Act**.  Asa public company, Alliance Bancorp is subject to the Sarbanes-Oxley Act of2002, which implements a broad range of corporate governance and accountingmeasures for public companies designed to promote honesty and transparency incorporate America and better protect investors from corporate wrongdoing.  The Sarbanes-Oxley Act’s principallegislation and the derivative regulation and rule-making promulgated by theSecurities and Exchange Commission includes:

·                                          thecreation of an independent accounting oversight board;

·                                          auditorindependence provisions that restrict non-audit services that accountants mayprovide to their audit clients;

·                                          additionalcorporate governance and responsibility measures, including the requirementthat the chief executive officer and chief financial officer certify financialstatements;

·                                          arequirement that companies establish and maintain a system of internal controlover financial reporting and that a company’s management provide an annualreport regarding its assessment of the effectiveness of such internal controlover financial reporting to the company’s independent accountants and that suchaccountants provide an attestation report with respect to management’sassessment of the effectiveness of the company’s internal control overfinancial reporting;

·                                          theforfeiture of bonuses or other incentive-based compensation and profits fromthe sale of an issuer’s securities by directors and senior officers in thetwelve month period following initial publication of any financial statementsthat later require restatement;

·                                          anincrease in the oversight of, and enhancement of certain requirements relatingto audit committees of public companies and how they interact with the company’sindependent auditors;

·                                          therequirement that audit committee members must be independent and are absolutelybarred from accepting consulting, advisory or other compensatory fees from theissuer;

·                                          therequirement that companies disclose whether at least one member of thecommittee is a “financial expert” (as such term is defined by the Securitiesand Exchange Commission) and if not, why not;

30

----

·                                          expandeddisclosure requirements for corporate insiders, including accelerated reportingof stock transactions by insiders and a prohibition on insider trading duringpension blackout periods;

·                                          aprohibition on personal loans to directors and officers, except certain loansmade by insured financial institutions;

·                                          disclosureof a code of ethics and the requirement of filing of a Form 8-K for a change orwaiver of such code;

·                                          mandatorydisclosure by analysts of potential conflicts of interest; and

·                                          arange of enhanced penalties for fraud and other violations.

Although AllianceBancorp anticipates 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.

**FEDERAL AND STATE TAXATION**

**General.**  Alliance Bancorp, Alliance Mutual HoldingCompany and Alliance Bank are subject to federal income tax provisions of theInternal Revenue Code of 1986, as amended, in the same general manner as othercorporations with some exceptions listed below. For federal income tax purposes, Alliance Bancorp intends to file a consolidatedfederal income 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.**  Forfederal income tax purposes, income and expenses are reported on the accrualmethod of accounting and Alliance Bancorp will file its federal income taxreturn using a December 31 fiscal year end.

**Bad Debt Reserves.**  The Small Business JobProtection Act of 1996 eliminated the use of the reserve method of accountingfor bad debt reserves by savings institutions, effective for taxable yearsbeginning after 1995.  Prior to thattime, Alliance Bank was permitted to establish a reserve for bad debts and tomake 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 tothe Small Business Job Protection Act, bad debt reserves created prior toJanuary 1, 1988 were subject to recapture into taxable income if Alliance Bankfailed to meet certain thrift asset and definitional tests.  New federal legislation eliminated thesethrift related recapture rules.  However,under current law, pre-1988 reserves remain subject to recapture shouldAlliance Bank make certain non-dividend distributions or cease to maintain asavings bank charter.

At December 31, 2006, Alliance Bank’s total federal pre-1988 reserve wasapproximately $7.1 million.  The reservereflects the cumulative effects of federal tax deductions for which no federalincome tax provisions have been made.

**Minimum Tax.**  The Internal Revenue Codeimposes an alternative minimum tax (“AMT”) at a rate of 20% on a base ofregular taxable income plus certain tax preferences (“alternative minimumtaxable income” or “AMTI”).  The AMT ispayable to the extent such AMTI is in excess of an exemption amount.  Net operating losses can offset no more than90% of AMTI.  Certain payments ofalternative minimum tax may be used as credits against regular tax liabilitiesin future years.  Alliance Bank has beensubject to the AMT and as of December 31, 2006, had $888,000 of AMT availableas credit for carryover purposes.

**Net Operating Loss Carryovers.**  Netoperating losses incurred in taxable years beginning before August 6, 1997may be carried back to the three preceding taxable years and forward to thesucceeding 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, 2006, Alliance Bank hadapproximately $200,000 and $400,000 in net operating loss carryforwardsexpiring in 2025 and 2026, respectively, for federal income tax purposes.

**Corporate Dividends-Received Deduction.**  AllianceBancorp may exclude from income 100% of dividends received from a member of thesame affiliated group of corporations.  The corporate dividends received deduction is80% in the case of dividends received from corporations, which a corporaterecipient owns less than 80%, but at least 20% of the distribution corporation.  Corporations which own less than 20% of thestock of a corporation distributing a dividend may deduct only 70% of dividendsreceived.

31

----

** **

**Other Matters. **Alliance Bank has not been audited by the IRSduring the last five years.

**Pennsylvania Taxation.**  AllianceBancorp is subject to the Pennsylvania Corporate Net Income Tax and CapitalStock and Franchise Tax.  The CorporationNet Income Tax rate for fiscal 2005 is 9.99% and is imposed on unconsolidatedtaxable income for federal purposes with certain adjustments.  In general, the Capital Stock Tax is aproperty tax imposed at the rate of approximately 0.489% (for 2005) of acorporation’s capital stock value, which is determined in accordance with afixed formula based upon average net income and net worth.

Alliance Bank is subject to tax under the Pennsylvania Mutual ThriftInstitutions Tax Act (the “MTIT”), as amended to include thrift institutionshaving capital stock.  Pursuant to theMTIT, the tax rate is 11.5%.  The MTITexempts Alliance Bank from other taxes imposed by the Commonwealth ofPennsylvania for state income tax purposes and from all local taxation imposedby political subdivisions, except taxes on real estate and real estatetransfers.  The MTIT is a tax upon netearnings, determined in accordance with U.S. generally accepted accountingprinciples with certain adjustments.  TheMTIT, in computing income under U.S. generally accepted accounting principles,allows for the deduction of interest earned on state and federal obligations,while disallowing 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, 2006,the Bank had approximately $200,000, $100,000 and $600,000 in NOL carryforwardsexpiring in 2007, 2008 and 2009, respectively, for state tax purposes.

**Item 1A.Risk Factors**

Like all financialcompanies, the Company’s business and results of operations are subject to anumber of risks, many of which are outside of the Company’s control.  In addition to the other information in thisreport, readers should carefully consider that the following important riskfactors, among others, could materially impact the Company’s business and futureresults of operations.  In addition, inanalyzing whether to make or continue an investment in the Company’ssecurities, investors should consider, among other factors, the following riskfactors.

**Our LoanPortfolio Includes A Significant Amount of Loans Which Have a Higher Risk ofLoss than Conforming, Single-Family Residential Mortgage Loans.**

As of December 31,2006, $108.3 million or 45.4% of our loan portfolio consisted of commercialreal estate loans.  In addition, at suchdate, we had $23.3 million of single-family residential mortgage loansconsidered subprime loans, generally due to the borrowers’ credit scores beingbelow certain regulatory thresholds, $11.8 million of construction loans and$2.1 million of multi-family residential real estate loans.  Commercial real estate loans, subprimeresidential mortgage loans, construction loans and multi-family residentialmortgage loans all are generally considered to have a higher risk of loss thanconforming, single-family residential mortgage loans.  Commercial real estate and multi-familyresidential real estate loans generally are considered to have a higher risk ofloss because repayment of the loans often depends on the successful operationof a business or the underlying property securing the loan.  Such loans typically involve larger loanbalances to single borrowers or groups of related borrowers compared to one- tofour-family residential mortgage loans. Accordingly, an adverse developmentwith respect to one loan or one credit relationship can expose us to greaterrisk of loss compared to an adverse development with respect to a one- tofour-family residential mortgage loan. We seek to minimize these risks throughour underwriting policies, which require such loans to be qualified on thebasis of the property’s net income and debt service coverage ratio; however,there is no assurance that our underwriting policies will protect us fromcredit-related losses.  Constructionloans generally have a higher risk of loss than single-family residential mortgageloans due primarily to the critical nature of the initial estimates of aproperty’s value upon completion of construction compared to the estimatedcosts, including interest, of construction as well as other assumptions.  If the estimates upon which constructionloans are made prove to be inaccurate, we may be confronted with projects that,upon completion, have values which are below the loan amounts.  Commercial and multi-family real estate loansand construction loans are also typically larger than single-family residentialmortgage loans. The deterioration of one or more of these loans could cause asignificant increase in non-performing loans, which could adversely affect ourresults of operations by requiring us to increase our provisions for loanlosses.  The net proceeds from theoffering will increase our capital and facilitate our ability to make largercommercial real estate and construction loans by increasing our internal loansto one borrower limits.  We expect tomake larger commercial real estate and construction loans and to increase ourconstruction lending activity upon completion of the reorganization and theoffering.  By their nature, subprimeloans are generally considered to have a greater degree of credit risk thanconforming residential mortgage loans because the lower credit score of theborrower may indicate a reduced ability to remain current on loanpayments.  As a result of the compositionof our loan portfolio, our credit risk profile will be higher than traditionalthrift institutions that have higher concentrations of one- to four-familyresidential loans.

32

----

 

**RisingInterest Rates May Hurt Our Profits.**

Interest rateswere recently at historically low levels. However, since June 30, 2004, the U.S. Federal Reserve has increased itstarget for the federal funds rate 17 times from 1.00% to 5.25%.  If interest rates continue to rise, and ifrates on our deposits continue to reprice upwards faster than the rates on ourloans and investments, we would experience continued compression of ourinterest rate spread and net interest margin, which would have a negative effecton our profitability.  For the year endedDecember 31, 2004, our average interest rate spread and our net interest marginamounted to 3.00% and 3.23%, respectively. These ratios have steadily declined since such time.  Our average interest rate spread declined to2.74% for the year ended December 31, 2005 and to 2.49% for the year endedDecember 31, 2006.  Correspondingly, ournet interest margin decreased to 3.00% and 2.82% for such respective periods.  In addition, increases in interest ratescould increase our cost of funds with respect to any new borrowings that we mayobtain in the future.

**ASignificant Percentage of Our Assets Are Invested in Lower Yielding InvestmentsWhich Has Hindered and May Continue To Hinder Our Ability To Be More Profitable.**

Our results of operationsare significantly affected by changes in interest rates and are substantiallydependant on our net interest income, which is the difference between theinterest income earned on our interest-earning assets and the interest expensepaid on our interest-bearing liabilities. At December 31, 2006, $48.3 million, or 11.8% of our assets wereinvested in cash or cash equivalents and $102.9 million or 25.1% of our assetswere invested in investment and mortgage-backed securities which yield lessthan would be obtained if such funds were invested in loans. The Bank hasmaintained a significant portion of its assets in short-term liquid assets toprovide flexibility to invest in loans and other higher yielding assets in arising rate environment, manage interest rate risk and provide interest incomewith minimal credit risk.

**Increasesin Market Rates of Interest Could Adversely Affect Our Stockholders’ Equity.**

At December 31,2006, we held approximately $78.7 million in available-for-sale securities,representing 19.2% of our total assets. Generally accepted accounting principles require that these securitiesbe carried at fair value on our balance sheet. Unrealized holding gains or losses on these securities, that is, thedifference between the fair value and the amortized cost of these securities,net of deferred taxes, is reflected in our stockholders’ equity.  Increases in interest rates will reduce thevalue of our available-for-sale securities portfolio.

As of December 31,2006, our available-for-sale securities portfolio had a net unrealized loss ofapproximately $1.9 million compared to $2.0 million at December 31, 2005.  The decrease in the fair value of ouravailable-for-sale securities affects our stockholders’ equity because it causesan increase in accumulated other comprehensive loss, which is a component oftotal stockholders’ equity. Comprehensive income or loss is recorded to represent the impact onstockholders’ equity as if such securities were sold at such time.

**A Downturnin the Regional Economy or a Decline in Real Estate Values Could Hurt Our NetIncome.**

A significantmajority of our loans are secured by real estate in the southeasternPennsylvania.  As a result of thisconcentration, a downturn in the regional economy could cause significantincreases in nonperforming loans, which would hurt our net income.  In recent years, there has been a significantincrease in real estate values in our market area.  As a result of rising home prices, ourresidential loans generally have been well collateralized.  A decline in real estate values could causesome of our mortgage loans to become inadequately collateralized, which wouldexpose us to a greater risk of loss. Additionally, a decline in real estate values could adversely impact ourportfolio of commercial real estate loans and could result in a decline in theorigination of such loans.

**StrongCompetition Within Our Market Area Could Hurt our Profits and Slow Growth.**

We face intense competition both in making loans and attractingdeposits.  This competition has made itmore difficult for us to make new loans and attract deposits.  Price competition for loans and depositsmight result in us earning less on our loans and paying more on our deposits,which would reduce net interest income. Competition also makes it more difficult to maintain and improve marketshare of loans and deposits.  Some of theinstitutions with which we compete have substantially greater resources andlending limits than we have and may offer services that we do not provide.  We expect continued strong competition in thefuture.  Our profitability depends uponour continued ability to compete successfully in our market area.

33

----

**WeOperate in a Highly Regulated Environment and We May Be Adversely Affected ByChanges in Laws and Regulations.**

Alliance Bank is subject to extensive regulation, supervision andexamination by the Pennsylvania Department of Banking and by the FDIC.  Alliance Bancorp and Alliance Mutual HoldingCompany are subject to regulation and supervision by the Office of ThriftSupervision.  Such regulation andsupervision governs the activities in which an institution and its holdingcompany may engage, and are intended primarily for the protection of theinsurance fund and the depositors and borrowers of Alliance Bank rather thanfor holders of Alliance Bancorp common stock. Regulatory authorities have extensive discretion in their supervisoryand enforcement activities, including the imposition of restrictions on ouroperations, the classification of our assets and determination of the level ofour allowance for loan losses.  Anychange in such regulation and oversight, whether in the form of regulatorypolicy, regulations, legislation or supervisory action, may have a materialimpact on our operations.

**AllianceMutual Holding Company Owns a Majority of Alliance Bancorp’s Outstanding CommonStock and is Able to Control the Result of Most Matters Put to a Vote ofAlliance Bancorp’s Stockholders.**

AllianceMutual Holding Company owns majority of our common stock, and, through itsboard of directors, is able to exercise voting control over most matters put toa vote of our stockholders.  The samedirectors and officers who manage Alliance Bancorp and Alliance Bank also willmanage Alliance Mutual Holding Company. No assurances can be given that Alliance Mutual Holding Company will nottake action which the public stockholders believe to be contrary to theirinterests.  For example, Alliance MutualHolding Company could approve the implementation of stock benefit plans,prevent a sale or merger transaction or defeat a candidate for Alliance Bancorp’sboard of directors or other proposals put forth by the publicstockholders.  Moreover, Alliance MutualHolding Company’s ownership of a majority of the outstanding shares of AllianceBancorp’s common stock is likely to perpetuate existing management anddirectors.  In addition, the Office ofThrift Supervision recently proposed that if stock benefit plans areimplemented more than one year from an offering conducted by an institution inthe mutual holding company format, there would be no specific requirement thatstockholders other than the mutual holding company approve such plans.  Accordingly, if such proposal is adopted bythe Office of Thrift Supervision and if Alliance Bancorp were to wait for morethan one year after completion of its recent offering to implement its newstock option plan and stock recognition and retention plan, the approval ofsuch plans solely by Alliance Mutual Holding Company would be sufficient forsuch plans to be adopted.

**OurStock Value May Suffer From Federal Regulations Restricting Takeovers.**

For three yearsfollowing the completion of our recent offering (January 30, 2010), Office ofThrift Supervision regulations prohibit any person from acquiring or offeringto acquire more than 10% of our common stock without the prior written approvalof the Office of Thrift Supervision. Accordingly, the range of potential acquirors for Alliance Bancorp willbe limited which will correspondingly reduce the likelihood that stockholderswill be able to realize a gain on their investment through an acquisition ofAlliance Bancorp.

**Item1B.  Unresolved Staff Comments**

None

 

34

----

 

**Item2.  Properties.**

**Officesand Properties**

At December 31,2006, the Bank conducted its business from its executive offices in Broomall,Pennsylvania and seven nine service offices, all of which are located insoutheastern Pennsylvania.

The following tablesets forth certain information with respect to the office and other propertiesof the Bank at December 31, 2006.
| **Description/Address**      | ** ** | **Leased/Owned** | ** ** | **Net Book   Value of   Premises and   Fixed Assets** | ** ** | **Amount of   Deposits** | ** ** |
|------------------------------|------------|------------------|------------|------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                   | ** ** | ** **       | ** ** | **(In Thousands)**                                                                  | ** ** |
| MAIN OFFICE                  |       |             |       |                                                                                     |       |                               |       |
|                         |       |             |       |                                                                                     |       |                               |       |
| Lawrence Park                |       | Owned            |       | $                                                                                        | 1,597      |                               | $          | 81,347 |   |
| 541 Lawrence Road            |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
| Broomall, PA 19008           |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
|                         |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
| BRANCH OFFICES               |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
|                         |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
| Upper Darby                  |       | Leased  (1)      |       | 34                                                                                       |       | 44,428                             |       |
| 69th and Walnut Sts          |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
| Upper Darby, PA 19082        |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
|                         |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
| Secane                       |       | Leased  (2)      |       | 262                                                                                      |       | 53,596                             |       |
| 925 Providence Road          |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
| Secane, PA 19018             |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
|                         |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
| Newtown Square               |       | Leased  (3)      |       | 52                                                                                       |       | 22,855                             |       |
| 252 & West Chester  Pike |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
| Newtown Square, PA  19073    |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
|                         |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
| Havertown                    |       | Leased  (4)      |       | 122                                                                                      |       | 43,315                             |       |
| 500 E. Township Line  Road   |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
| Havertown, PA 19083          |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
|                         |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
| Lansdowne                    |       | Owned            |       | 130                                                                                      |       | 24,822                             |       |
| 9 E. Baltimore Pike          |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
| Lansdowne, PA 19050          |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
|                         |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
| Springfield                  |       | Leased  (5)      |       | 550                                                                                      |       | 32,310                             |       |
| 153 Saxer Avenue             |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
| Springfield, PA 19064        |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
|                         |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
| Shoppes at Britton Lake      |       | Leased  (6)      |       | 303                                                                                      |       | 21,323                             |       |
| 979 Baltimore Pike           |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
| Glen Mills, PA 19342         |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
|                         |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
| Paoli Shopping Center        |       | Leased (7)       | ** ** | 93                                                                                       | ** ** | 9,806                              | ** ** |
| 82 E. Lancaster Ave.         |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
| Paoli, PA  19301        |       |             | ** ** | ** **                                                                               | ** ** | ** **                         | ** ** |
|                              |            |                  |            |                                                                                          |            |                                    |            |  |  |

----

(1)             Thelease expires in February 2010.

(2)             Thelease expires in April 2011 with one remaining option to extend the lease forten years.

(3)             Thebuilding is owned but the ground is leased. The lease expires in June 2011 with one remaining options to extend thelease for five years each.  The Bankintends to exercise this option.

35

----

(4)             Thelease expires in January 2009 with three successive options to extend the leasefor five years each.

(5)             Thelease expires in September 2015.

(6)             TheBank commenced business at this location in March 2002.  The lease expires in April 2022 with twosuccessive options to extend the lease for five years each.

(7)             Thisbranch opened in January 2005.  The leaseexpires May 2012.

**Item3.  Legal Proceedings.**

The Bank 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**.

The information required herein is incorporated byreference from the Bank’s definitive proxy statement dated March 30, 2007 (“DefinitiveProxy Statement”).

**PART II.**

**Item5.  Market for Common Equity, and RelatedStockholder Matters and Purchases of Equity Securities.**

Certain of theinformation required herein is incorporated by reference from page 51 of theBank’s 2006 Annual Report to Stockholders (“2006 Annual Report”).

The followinggraph demonstrates comparison of the cumulative total returns for the commonstock of the Company, the SNL Bank and Thrift Index, and the Nasdaq CompositeIndex since the close of trading of the Company’s common stock on December 31,2001.  The graph represents $100 investedin the Company’s common stock as of December 31, 2001.  The cumulative total returns do include thepayment of dividends by the Company.

36

----

 
| ** **                              | ** ** | **Period Ending** | ** ** |
|-----------------------------------------|------------|------------------------|------------|
| **Index**                               | ** ** | **12/31/01**           | ** ** | **12/31/02** | ** ** | **12/31/03** | ** ** | **12/31/04** | ** ** | **12/31/05** | ** ** | **12/31/06** | ** ** |
| Alliance  Bancorp, Inc. of Pennsylvania |       | 100.00                 |       | 86.97 |   | 105.19 |   | 150.23 |   | 101.68 |   | 88.36 |   |
| NASDAQ Composite                        |       | 100.00                 |       | 68.76 |   | 103.67 |   | 113.16 |   | 115.57 |   | 127.58 |   |
| SNL Bank and Thrift  Index              |       | 100.00                 |       | 93.96 |   | 127.39 |   | 142.66 |   | 144.89 |   | 169.30 |   |

 

**Item6.  Selected Financial Data.**

The informationrequired herein is incorporated by reference from pages 5 to 7 of the 2006Annual Report.

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

The informationrequired herein is incorporated by reference from pages 7 to 22 of the 2006Annual Report.

**Item7A.  Quantitative and QualitativeDisclosures About Market Risk.**

The informationrequired herein is incorporated by reference from pages 10 to 12 of the 2006Annual Report.

**Item8.  Financial Statements andSupplementary Data.**

The informationrequired herein is incorporated by reference from pages 7 to 49 of the 2006Annual Report.

**Item9.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

Not applicable.

**Item9A.  Controls and Procedures.**

The Bank’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) under theSecurities Exchange Act of 1934) as of the end of the period covered by thisreport. Based on such evaluation, the Chief Executive Officer and the ChiefFinancial Officer have concluded that the Bank’s disclosure controls andprocedures are designed to ensure that financial information required to bedisclosed by the Bank 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 and areoperating in an effective manner.

No change in theBank’s internal control over financial reporting (as defined in Rules 13a-15(f)and 15d-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.

**Item9B.  Other Information.**

Not applicable.

**PART III.**

**Item10.  Directors, Executive Officers andCorporate Governance.**

Certain of theinformation required herein is incorporated by reference from the DefinitiveProxy Statement.

**Item11.  Executive Compensation.**

The informationrequired herein is incorporated by reference from the Definitive ProxyStatement.

37

----

 

**Item 12.Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters.**

The informationrequired herein is incorporated by reference from the Definitive ProxyStatement.

**Item13.  Certain Relationships and RelatedTransactions, and Director Independence.**

The informationrequired herein is incorporated by reference from the Definitive ProxyStatement

**Item14.  Principal Accounting Fees andServices.**

The informationrequired herein is incorporated by reference from the Definitive ProxyStatement

**PART III.**

**Item15.  Exhibits and Financial StatementSchedules.**

   (1) The following financial statements areincorporated by reference from Item 7 hereof (see Exhibit 13):
|    |   | Report of Independent Registered Public Accounting  Firm.                        |
|--------------|--------|----------------------------------------------------------------------------------|
|         |   | Consolidated Statements of Financial Condition at  December 31, 2006 and 2005.   |
|         |   | Consolidated Statements of Income for each of the  Three Years in the Period     |
|         |   | Ended December  31, 2006.                                                        |
|         |   | Consolidated Statements of Changes in Stockholders’  Equity for each of the |
|         |   | Three Years in  the Period Ended December 31, 2006.                              |
|         |   | Consolidated Statements of Cash Flows for each of  the Three Years               |
|         |   | in the Period  Ended December 31, 2006.                                          |
|         |   | Notes to Consolidated Financial Statements.                                      |

 

  (2) All schedules are omitted because of theabsence of conditions under which they are required or because the requiredinformation is included in the financial statements and related notes thereto.

  (3) The following exhibits are filed as partof this Form 10-K and this list includes the Exhibit Index.
| No   |   | Description                                                                                                                           |   |   |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 2.1  |   | Agreement and Plan of  Reorganization*                                                                                                |
| 2.2  |   | Plan of Additional  Stock Issuance*                                                                                                   |
| 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*                     |
| 13.0 |   | 2006 Annual Report to  Stockholders                                                                                                   |
| 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 (FileNo. 333-136853) filed with the Securities and Exchange Commission.

38

----

 

**SIGNATURES**

Pursuant to therequirements of Section 13 of the Securities Exchange Act of 1934, the Bank hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
| **  ** | ** ** | **ALLIANCE BANCORP, INC, OF PENNSYLVANIA** |
|------------------|------------|--------------------------------------------|
| ** **       | ** ** | ** **                                 |
| ** **       | ** ** | ** **                                 |
|        |       | 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 30, 2007 |
|---------------------------------------------------------------------------------------------------------------------|--------|----------------|
| Dennis D. Cirucci  President and Chief Executive Officer  (Principal Executive Officer)                             |   |           |
|                                                                                                                |   |           |
|                                                                                                                |   |           |
| /s/Peter J. Meier                                                                                                   |   | March 30, 2007 |
| Peter J. Meier  Executive Vice President  and Chief Financial Officer  (Principal Financial and Accounting Officer) |   |           |
|                                                                                                                |   |           |
|                                                                                                                |   |           |
| /s/William E. Hecht                                                                                                 |   | March 30, 2007 |
| William E. Hecht  Chairman of the Board                                                                             |   |           |
|                                                                                                                |   |           |
|                                                                                                                |   |           |
|  /s/J. William  Cotter, Jr.                                                                                    |   | March 30, 2007 |
| J. William Cotter, Jr.  Director                                                                                    |   |           |
|                                                                                                                |   |           |
|                                                                                                                |   |           |
|  /s/John A.  Raggi                                                                                             |   | March 30, 2007 |
| John A. Ragg  Director                                                                                         |   |           |

39

----

 
|                              |   |           |
|------------------------------|--------|----------------|
|                         |   |           |
|  /s/Philip K.  Stonier  |   | March 30, 2007 |
| Philip K. Stonier  Director  |   |           |
|                         |   |           |
|                         |   |           |
|  /s/James S.  Carr      |   | March 30, 2007 |
| James S. Carr  Director      |   |           |
|                         |   |           |
|                         |   |           |
| /s/G. Bradley Rainer         |   | March 30, 2007 |
| G. Bradley Rainer  Director  |   |           |
|                         |   |           |
|                         |   |           |
| /s/R. Cheston Woolard        |   | March 30, 2007 |
| R. Cheston Woolard Director  |   |           |
|                         |   |           |
|                         |   |           |
|  /s/Timothy E.  Flatley |   | March 30, 2007 |
| Timothy E. Flatley Director  |   |           |

 

40

----