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** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

**x****     ****ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31, 2009**

 

**OR**

 

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

 

**For the transition period from              to              **

 

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

 

**ALLIANCE BANCORP, INC. OF PENNSYLVANIA**

(Exact name of registrant as specified in its charter)

 

| **Pennsylvania**                  | ** ** | **56-2637804**         |
|-----------------------------------|------------|------------------------|
| (State or other jurisdiction      |       | (I.R.S. Employer       |
| of incorporation or organization) |       | Identification Number) |

** **

| **541 Lawrence Road**      |       |       |
|----------------------------|------------|------------|
| **Broomall, Pennsylvania** | ** ** | **19008**  |
| (Address)                  |       | (Zip Code) |

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o  No o

 

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

 

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

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

 

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

 

As of June 30, 2009, theaggregate value of the 2,896,525 shares of Common Stock of the Registrantissued and outstanding on such date, which excludes 3,973,750 shares held bythe Registrant’s mutual holding company, Alliance Mutual Holding Company, and354,725 shares held by all directors and officers of the Registrant and theRegistrant’s Employee Stock Ownership Plan (“ESOP”) as a group, and treasuryshares was approximately $20.5 million.  Thisfigure is based on the last trade price of $8.53 per share of the Registrant’sCommon Stock on June 30, 2009.  Althoughdirectors and officers and the ESOP were assumed to be “affiliates” of theRegistrant for purposes of this calculation, the classification is not to beinterpreted as an admission of such status.

 

The number of shares outstanding of Common Stock of the Registrant as of March 5, 2010, was 6,709,676.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

(1)                                  Portions of thedefinitive proxy statement for the Annual Meeting of Stockholders to be held April 28,2010 are incorporated into Part III.

 

 

 

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TABLE OF CONTENTS

 
| ** **     | ** **  | ** **                                                                                            | ** ** | **PAGE** |
|----------------|-------------|-------------------------------------------------------------------------------------------------------|------------|----------|
|           |        |                                                                                                  |       |     |
| PART I:   | Item 1      | Business                                                                                              |       | 3        |
|           | Item 1A     | Risk Factors                                                                                          |       | 31       |
|           | Item  1B    | Unresolved  Staff Comments                                                                            |       | 31       |
|           | Item 2      | Properties                                                                                            |       | 31       |
|           | Item 3      | Legal Proceedings                                                                                     |       | 33       |
|           | Item 4      | [Reserved]                                                                                            |       | 33       |
|           |        |                                                                                                  |       |     |
| PART II:  | Item  5     | Market  for Common Equity, and Related   Stockholder Matters and Purchases of Equity Securities  |       | 34       |
|           | Item 6      | Selected  Financial Data                                                                              |       | 36       |
|           | Item  7     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations           |       | 38       |
|           | Item  8     | Financial  Statements and Supplementary Data                                                          |       | 49       |
|           | Item  9     | Changes  In and Disagreements with Accountants on Accounting and Financial Disclosure                 |       | 81       |
|           | Item  9A(T) | Controls  and Procedures                                                                              |       | 81       |
|           | Item 9B     | Other Information                                                                                     |       | 81       |
|           |        |                                                                                                  |       |     |
| PART III: | Item  10    | Directors,  Executive Officers and Corporate Governance                                               |       | 82       |
|           | Item  11    | Executive  Compensation                                                                               |       | 82       |
|           | Item  12    | Security  Ownership of Certain Beneficial Owners and Management and Related  Stockholder Matters |       | 82       |
|           | Item  13    | Certain  Relationships and Related Transactions and Director Independence                             |       | 82       |
|           | Item  14    | Principal  Accountant Fees and Services                                                               |       | 82       |
|           |        |                                                                                                  |       |     |
| PART IV:  | Item  15    | Exhibits,  Financial Statements and Schedules                                                         |       | 83       |
|           |        |                                                                                                  |       |     |
| SIGNATURES     |        |                                                                                                  | 84         |

 

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**PART I**

 

**Item1.  Business**

 

**General**

 

Alliance Bancorp, Inc.of Pennsylvania (“Alliance Bancorp” or the “Company”) is a federally charteredsavings and loan holding company which owns 100% of the capital stock ofAlliance Bank (“Bank”), which is a Pennsylvania chartered community orientedsavings bank headquartered in Broomall, Pennsylvania.  On January 30, 2007, the Bank completeda reorganization to a mid-tier holding company structure.  In the reorganization and offering, theCompany sold 1,807,339 shares of common stock at a purchase price of $10.00 pershare and issued 5,417,661 shares of common stock in exchange for formeroutstanding shares of Alliance Bank (the “Bank”).  Each share of the Bank’s common stock wasconverted into 2.09945 shares of the Company’s common stock.  The offering resulted in approximately $16.5million in net proceeds to the Company. The significant asset of the Company is the capital stock of the Bank.

 

Alliance Bank operates atotal of nine banking offices located in Delaware and Chester Counties, whichare suburbs of Philadelphia.  Our primarybusiness consists of attracting deposits from the general public and usingthose funds, together with funds we borrow, to originate loans to our customersand invest in securities such as U.S. Government and agency securities,mortgage-backed securities and municipal obligations.  At December 31, 2009, we had $464.2million of total assets, $378.3 million of total deposits and stockholders’equity of $48.4 million.

 

The Company issubject to supervision and regulation by the Office of Thrift Supervision (“OTS”).  The Bank is subject to regulation by thePennsylvania Department of Banking (the “Department”), as its charteringauthority and primary regulator, and by the Federal Deposit InsuranceCorporation (the “FDIC”), which insures the Bank’s deposits up to applicablelimits.

 

**Market Area and Competition**

 

Alliance Bank is headquartered in Broomall, Pennsylvania and conductsits business through eight offices located in Delaware County, Pennsylvania,and one office in Chester County, Pennsylvania. The primary market areas served by Alliance Bank are Delaware andChester Counties, Philadelphia, and the suburban areas to the west and south ofPhiladelphia, including southern New Jersey.

 

Delaware and Chester Counties have a large, well-educated, and skilledlabor force, with nearly one quarter of the counties’ population having earneda four-year college degree. In addition, Philadelphia’s central location in theNortheast corridor, infrastructure, and other factors have made the Bank’sprimary market area attractive to many large corporate employers, includingComcast, Boeing, State Farm Insurance, United Parcel Service, PECO Energy, SAPAmerica, Inc. and Wawa.

 

The Philadelphia area economy is typical of many large northeasterncities where the traditional manufacturing-based economy has declined and beenreplaced by the service sector, including the health care market.Crozer/Keystone Health System, Main Line Health, Jefferson Health System, MercyHealth Corp., and Astra-Zeneca are among the larger health care employerswithin the Bank’s market area. According to the Delaware County Chamber ofCommerce, there are more than 65 degree-granting institutions in the DelawareValley region, representing a higher density of colleges and universities thanany other area in the United States.

 

The population of Delaware County is reported at over half a million residentsand is the fifth most populated county in the Commonwealth of Pennsylvania.Much of the growth and development continues to be in the western part of thecounty and in adjacent Chester County. Chester County’s growth rate is expectedto increase even further in the next decade, and some of the communities inChester County that are experiencing the most rapid growth — East MarlboroughTownship, New Garden Township and East Goshen — surround the Bank’s ChesterCounty branch.

 

We face strongcompetition, both in attracting deposits and making real estate and commercialloans. Our most direct competition for deposits has historically come fromother savings banks, credit unions, and commercial banks located in our marketarea. This includes many large regional financial institutions and internetbanks which have even greater financial and marketing resources available tothem. The ability of the Bank to attract and retain core deposits depends onits ability to provide a competitive rate of return, liquidity, and serviceconvenience comparable to those offered by competing investment opportunities.The Bank’s management remains focused on attracting core deposits through itsbranch network, business development efforts, and commercial business relationships.

 

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**LendingActivities**

 

**General.** At December 31, 2009, the Bank’s total portfolio of loansreceivable amounted to $288.7 million, or 62.2%, of the Bank’s $464.2 millionof total assets at such time.  Prior to1996 the Bank traditionally concentrated its lending activities on firstmortgage loans secured by residential property. However, over the past fourteen years, the Bank has placed an emphasison loans secured by commercial real estate properties.  Consistent with such approach, commercialreal estate loans amounted to $131.9 million or 45.7% of the total loan portfolioat December 31, 2009 while single family residential mortgage loansamounted to $115.0 million or 39.8% of the total loan portfolio.  To a significantly lesser extent, the Bankalso originates multi-family loans, land and construction loans, consumer loansand commercial business loans.  At December 31,2009, such loan categories amounted to $1.2 million, $24.6 million, $7.6million and $8.4 million, respectively, or 0.4%, 8.5%, 2.6% and 2.9% of thetotal loan portfolio, respectively.

 

The Bank intends to continue the origination of single-familyresidential mortgage loans as well as its emphasis on increasing theorigination of commercial real estate loans. For the year ended December 31, 2009, the Bank’s commercial realestate loans increased by $8.4 million or 6.8% to $131.9 million. For the yearended December 31, 2009, the Bank’s single-family mortgage loans decreasedby $1.7 million or 1.5% to $115.0 million.

 

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**Loan Portfolio Composition**. The following table sets forth the composition of the Bank’s loanportfolio by type of loan at the dates indicated.

 
|                        |   | **December 31,**       |       |
|-----------------------------|--------|-----------------------------|------------|
|                        |   | **2009**                    |       | **2008** |   | **2007** |   | **2006** |   | **2005** |   |
|                        |   | **Amount**                  | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** |   |
|                        |   | **(Dollars  in Thousands)** |       |
| Real  estate loans:         |   |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Single-family  (1) (2) |   | $                           | 114,953    |   | 39.82 | % | $ | 116,683 |   | 41.43 | % | $ | 111,499 |   | 42.92 | % | $ | 108,551 |   | 45.48 | % | $ | 104,020 |   | 45.79 | % |
| Multi-family                |   | 1,231                       |       | 0.43 |   | 1,282 |   | 0.46 |   | 1,673 |   | 0.64 |   | 2,088 |   | 0.87 |   | 2,221 |   | 0.98 |   |
| Commercial                  |   | 131,874                     |       | 45.68 |   | 123,465 |   | 43.84 |   | 122,703 |   | 47.24 |   | 108,339 |   | 45.39 |   | 105,687 |   | 46.53 |   |
| Land  and construction: (3) |   |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                 |   | 12,284                      |       | 4.25 |   | 16,372 |   | 5.81 |   | 6,034 |   | 2.32 |   | 6,700 |   | 2.81 |   | 3,520 |   | 1.55 |   |
| Commercial                  |   | 12,297                      |       | 4.26 |   | 8,889 |   | 3.16 |   | 8,557 |   | 3.29 |   | 5,074 |   | 2.13 |   | 3,876 |   | 1.70 |   |
| Total  real estate loans    |   | 272,639                     |       | 94.44 |   | 266,691 |   | 94.70 |   | 250,466 |   | 96.41 |   | 230,752 |   | 96.68 |   | 219,324 |   | 96.55 |   |
|                        |   |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consumer:                   |   |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Student                     |   | 7,077                       |       | 2.45 |   | 5,455 |   | 1.94 |   | 1,782 |   | 0.69 |   | 1,779 |   | 0.74 |   | 2,440 |   | 1.07 |   |
| Savings  account            |   | 482                         |       | 0.17 |   | 430 |   | 0.15 |   | 477 |   | 0.18 |   | 561 |   | 0.24 |   | 566 |   | 0.25 |   |
| Other                       |   | 55                          |       | 0.01 |   | 51 |   | 0.02 |   | 109 |   | 0.04 |   | 103 |   | 0.04 |   | 88 |   | 0.04 |   |
| Total  consumer loans       |   | 7,614                       |       | 2.63 |   | 5,936 |   | 2.11 |   | 2,368 |   | 0.91 |   | 2,443 |   | 1.02 |   | 3,094 |   | 1.36 |   |
|                        |   |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial  business loans  |   | 8,458                       |       | 2.93 |   | 8,985 |   | 3.19 |   | 6,924 |   | 2.68 |   | 5,485 |   | 2.30 |   | 4,745 |   | 2.09 |   |
|                        |   |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  loans receivable     |   | 288,711                     |       | 100.00 | % | 281,612 |   | 100.00 | % | 259,758 |   | 100.00 | % | 238,680 |   | 100.00 | % | 227,163 |   | 100.00 | % |
|                        |   |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Less:                       |   |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred  fees (costs)      |   | 165                         |       |   |   | 6 |   |   |   | (5 | ) |   |   | 75 |   |   |   | 199 |   |   |   |
| Allowance  for loan losses  |   | 3,538                       |       |   |   | 3,169 |   |   |   | 2,831 |   |   |   | 2,719 |   |   |   | 2,670 |   |   |   |
|                        |   |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans  receivable, net      |   | $                           | 285,008    |   |   |   | $ | 278,437 |   |   |   | $ | 256,932 |   |   |   | $ | 235,886 |   |   |   | $ | 224,294 |   |   |   |

 

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| (1)    | At December 31, 2009, 2008, 2007, 2006, and  2005, includes $-0-, $-0-, $-0-, $125,000, and $-0- of loans classified as  held for sale, respectively.                                                         |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                               |
| (2)    | At December 31, 2009, 2008, 2007, 2006, and  2005, includes $21.4 million, $25.6 million, $29.5 million, $28.9 million,  and $22.8 million, respectively, of home equity loans and lines.                     |
|   |                                                                                                                                                                                                               |
| (3)    | At December 31, 2009, 2008, 2007, 2006, and  2005, excludes $10.7 million, $15.3 million, $10.8 million, $9.7 million, and  $2.9 million, respectively, of undisbursed funds on land and construction  loans. |

 

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**ContractualMaturities**.  The following table sets forth the scheduledcontractual maturities of the Bank’s loans receivable at December 31,2009.  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** | ** ** | **Consumer**     | ** ** | ** **     | ** ** | ** **                 | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|------------------|------------|----------------|------------|----------------------------|------------|
| ** **                                          | ** ** | **Single-family**      | ** ** | **Multi-family** | ** ** | **Commercial** | ** ** | **Land and  Construction** | ** ** | **and  Other  Loans** | ** ** | **Commercial  Business Loans** | ** ** | **Total** | ** ** |
| ** **                                          | ** ** | **(In  Thousands)**    | ** ** |
|                                                |       |                   |       |             |       |           |       |                       |       |   |   |   |   |   |   |
| Amounts  due in:                                    |       |                   |       |             |       |           |       |                       |       |   |   |   |   |   |   |
| One  year or less                                   |       | $                      | 270        |             | $          | 143            |       | $                          | 12,558     |   | $ | 24,581 |   | $ | 70 |   | $ | 3,316 |   | $ | 40,938 |   |
| After  one year through three years                 |       | 2,494                  |       | 859              |       | 10,818         |       | —                     |       | 105 |   | 2,032 |   | 16,308 |   |
| After  three years through five years               |       | 7,221                  |       | 137              |       | 20,387         |       | —                     |       | 369 |   | 2,488 |   | 30,602 |   |
| After  five years through fifteen years             |       | 37,367                 |       | 92               |       | 57,967         |       | —                     |       | 7,015 |   | 622 |   | 103,063 |   |
| Over  fifteen years                                 |       | 67,601                 |       | —           |       | 30,144         |       | —                     |       | 55 |   | — |   | 97,800 |   |
|                                                |       |                   |       |             |       |           |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  (1)                                          |       | $                      | 114,953    |             | $          | 1,231          |       | $                          | 131,874    |   | $ | 24,581 |   | $ | 7,614 |   | $ | 8,458 |   | $ | 288,711 |   |
|                                                |       |                   |       |             |       |           |       |                       |       |   |   |   |   |   |   |
| Interest  rate terms on amounts due after one year: |       |                   |       |             |       |           |       |                       |       |   |   |   |   |   |   |
| Fixed                                               |       | $                      | 45,497     |             | $          | 1,088          |       | $                          | 49,388     |   | — |   | — |   | $ | 5,142 |   | $ | 101,115 |   |
| Adjustable                                          |       | $                      | 69,186     |             | —     |           | $          | 69,928                     |       | — |   | $ | 7,544 |   | — |   | $ | 146,658 |   |

 

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(1) Doesnot include the effects relating to the allowance for loan losses and unearnedincome.

 

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.

 

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The followingtable shows origination, purchase and sale activity of the Bank with respect toits loans during the periods indicated.

 
| ** **                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **2009**                    | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                 | ** ** | **(In Thousands)**          | ** ** |
|                                       |       |                        |       |   |   |   |   |
| Real  estate loan originations:            |       |                        |       |   |   |   |   |
| Single-family  (1)                         |       | $                           | 12,215     |   | $ | 24,541 |   | $ | 28,601 |   |
| Multi-family                               |       | —                      |       | 120 |   | 980 |   |
| Commercial                                 |       | 37,910                      |       | 26,873 |   | 32,913 |   |
| Land  and construction:                    |       |                        |       |   |   |   |   |
| Residential                                |       | 3,114                       |       | 4,525 |   | 6,770 |   |
| Commercial                                 |       | 3,628                       |       | 6,536 |   | 2,828 |   |
| Total  real estate loan originations       |       | 56,867                      |       | 62,595 |   | 72,092 |   |
|                                       |       |                        |       |   |   |   |   |
| Consumer  originations:                    |       |                        |       |   |   |   |   |
| Student                                    |       | 2,147                       |       | 4,202 |   | 582 |   |
| Savings  account                           |       | 557                         |       | 310 |   | 330 |   |
| Other                                      |       | —                      |       | 4 |   | 7 |   |
| Total  consumer loan originations          |       | 2,704                       |       | 4,516 |   | 919 |   |
|                                       |       |                        |       |   |   |   |   |
| Commercial  business originations          |       | 1,966                       |       | 1,475 |   | 3,909 |   |
| Total  loan originations                   |       | 61,537                      |       | 68,586 |   | 76,920 |   |
|                                       |       |                        |       |   |   |   |   |
| Purchase  of real estate loans:            |       |                        |       |   |   |   |   |
| Single-family                              |       | —                      |       | — |   | — |   |
| Multi-family                               |       | —                      |       | — |   | — |   |
| Residential  construction                  |       | 1,000                       |       | — |   | — |   |
| Commercial                                 |       | 3,090                       |       | 175 |   | 113 |   |
| Commercial  construction                   |       | —                      |       | 6,300 |   | — |   |
| Total  real estate loan purchases          |       | 4,090                       |       | 6,475 |   | 113 |   |
| Total  loan originations and purchases (2) |       | 65,627                      |       | 75,061 |   | 77,033 |   |
|                                       |       |                        |       |   |   |   |   |
| Less:                                      |       |                        |       |   |   |   |   |
| Principal  loan repayments                 |       | (54,264                     | )          | (51,643 | ) | (51,002 | ) |
| Transfers  to OREO                         |       | (3,764                      | )          | — |   | — |   |
| Loans  and participations sold             |       | (500                        | )          | (1,335 | ) | (4,762 | ) |
| Other,  net (3)                            |       | (528                        | )          | (578 | ) | (223 | ) |
|                                       |       |                        |       |   |   |   |   |
| Net  increase                              |       | $                           | 6,571      |   | $ | 21,505 |   | $ | 21,046 |   |

 

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| (1)    |   | Includes $4.9 million, $5.1 million and $9.9 million  of home equity loans and lines of credit originated during the years ended  December 31, 2009, 2008 and 2007, respectively. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                   |
| (2)    |   | Includes originations of loans held for sale and  subsequently sold in the secondary market.                                                                                           |
|   |   |                                                                                                                                                                                   |
| (3)    |   | Includes gains on the sale of loans and provisions  for loan losses.                                                                                                                   |

 

 

**Origination, Purchase and Sale of Loans.** The lending activities of the Bank are subject to the written,non-discriminatory, underwriting standards and loan origination proceduresestablished by the Bank’s Board of Directors and management.  Loan originations are obtained by a varietyof sources, including referrals from real estate brokers, builders, existingcustomers, advertising, walk-in customers and, to a significant extent,mortgage brokers who obtain credit reports, appraisals and other documentationinvolved with a loan.  Propertyvaluations are always performed by independent outside appraisers.  Title and hazard insurance are generallyrequired on all security property other than property securing a home equityloan, in which case the Bank obtains a title opinion.  The majority of the Bank’s loans are securedby property located in its primary lending area.

 

A commercial residential real estate loan up to$500,000 must be approved by the loan officer and the Chief Lending 

 

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Officer.  Commercial real estate loans between $500,001and $1,000,000 must be approved by the Chief Executive Officer and one memberof the Senior Loan Committee.  Commercialreal estate loans between $1,000,001 and $2,000,000 must be approved by theSenior Loan Committee.  Commercial realestate loans over $2,000,001 must be approved by the Board of Directors.

 

A securedcommercial loan up to $250,000 must be approved by the loan officer and theChief Lending Officer.  Securedcommercial loans between $250,001 and $500,000 must be approved by the ChiefExecutive Officer and one member of the Senior Loan Committee.  Secured commercial loans between $500,001 and$2,000,000 must be approved by the Senior Loan Committee.  Secured commercial loans over $2,000,001 mustbe approved by the Board of Directors.

 

Unsecuredcommercial loans up to $100,000 must be approved by the loan officer and theChief Lending Officer.  Unsecuredcommercial loans between $100,001 and $500,001 must be approved by the ChiefExecutive Officer and one member of the Senior Loan Committee.  Unsecured commercial loans between $500,001and $750,000 must be approved by the Senior Loan Committee.  Unsecured commercial loans over $750,001 mustbe approved by the Board of Directors.

 

Residential realestate loans up to $250,000 must be approved by the loan officer and anAssistant Vice President.  Residentialreal estate loans between $205,001 and $500,000 must be approved by the loanofficer and a Senior Vice President. Residential real estate loans between $500,001 and $1,000,000 must beapproved by the loan officer and the Chief Lending Officer.  Residential real estate loans between$1,000,001 and $2,000,000 must be approved by the Senior Loan Committee.  Residential real estate loans over $2,000,001must be approved by the Board of Directors.

 

Home equity loans up to $100,000 must be approved bythe loan officer and an Assistant Vice President. Home equity loans between$100,001 and $250,000 must be approved by the loan officer and a Senior VicePresident. Home equity loans between $250,001 and $750,000 must be approved bythe loan officer and the Chief Lending Officer. Home equity loans between$750,001 and $2,000,000 must be approved by the Senior Loan Committee. Homeequity loans over $2,000,001 must be approved by the Board of Directors.

 

Consumer loans up to $100,000 must be approved by theloan officer and the Chief Lending Officer. Consumer loans between $100,001 and$2,000,000 must be approved by the Senior Loan Committee. Consumer loans over$2,000,001 must be approved by the Board of Directors.

 

The Bank’ssingle-family loan originations amounted to $12.2 million and $24.5 millionduring 2009 and 2008, respectively.  Whenpossible, the Bank emphasizes the origination of single-family residentialadjustable-rate mortgage loans (“ARMs”). During 2009 and 2008, $3.1 million and $10.3 million single familyresidential loans originated had adjustable rates, respectively.  The Bank also originates fixed-ratesingle-family residential real estate loans with terms of five, ten, twelve, 15and 30 years.  Generally, fixed-rateresidential mortgage loans with terms greater than 15 years have beenoriginated pursuant to commitments to sell such loans to correspondentmortgage-banking institutions in order to reduce the proportion of the Bank’sloan portfolio comprised of such assets and reduce interest rate risk.  Loans are sold without any recourse to theBank by the purchaser in the event of default on the loan by the borrower andare sold with servicing released.  TheBank sold $-0- million and $1.4 million of long-term (generally over 15 years)fixed-rate residential loans during 2009 and 2008, respectively.  Such loan sales were conducted in furtheranceof the Bank’s asset/liability strategies. At December 31, 2009 and December 31,2008, there were no loans held for sale.

 

In accordance withthe Bank’s increased emphasis on commercial real estate loan originations, suchoriginations amounted to $37.9 million and $26.9 million during 2009 and 2008,respectively.  In addition, land andconstruction loan originations amounted to $6.7 million and $11.1 million during2009 and 2008, respectively.

 

Since 1999, theBank has provided single-family residential loan products to borrowers that didnot meet the underwriting criteria of the Federal Home Loan MortgageCorporation (‘FHLMC”) and the Federal National Mortgage Association (“FNMA”)and where the borrower’s credit score is below 660.  The Bank recognizes that these loans, whichare considered subprime loans, have additional risk factors as compared totypical single-family residential lending. These loans are generally not saleable in the secondary market due tothe credit risk characteristics of the borrower, the underlying documentation,the loan-to-value ratio, or the size of the loan, among other factors.  At December 31, 2009 and 2008, the Bank’ssingle-family loan portfolio included $21.9 million or 19.1% and $24.1 millionor 20.6%, respectively, of such subprime loans. The Bank reported $53,000 or 0.1% and $1.9 million or 7.9% of theseloans as non-performing at December 31, 2009 and December 31, 2008,respectively.  The Bank recognizes theadditional risk factors associated with subprime lending and utilizes a higherrisk-weighting factor in maintaining its allowance for loan losses with respectto these loans. In addition, management calculates and reports the delinquencyratio of its subprime loan portfolio to the Board of Directors on a monthlybasis.

 

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Historically, theBank has not been an active purchaser of loans. The Bank purchased $4.0 million and $6.5 million during 2009 and 2008,respectively, of real estate loans, some of which are located outside of itsprimary lending area.  As of December 31,2009, the outstanding balance of such loans included $3.9 million ofresidential construction loans and $9.1 million in commercial real estateloans.  At December 31, 2009, noneof these loans were reported as non-performing.

 

**Single-FamilyResidential Real Estate Loans**.  The Bank hashistorically concentrated its lending activities on the origination of loanssecured primarily by first mortgage liens on existing single-family residencesand intends to continue to originate permanent loans secured by first mortgageliens on single-family residential properties in the future. At December 31,2009, $115.0 million or 39.8% of the Bank’s total loan portfolio consisted ofsingle-family residential real estate loans. Of the $115.0 million of such loans at December 31, 2009, $69.2million or 60.2% had adjustable rates of interest and $45.8 million or 39.8%had fixed rates of 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 200 basis points per year, with a limitof 600 basis points over the life of the loan.    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 loans on the basis of the borrower’s ability to pay at the initialrate 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 resulting in a decrease in thespread between the rates offered on fixed and adjustable rate loans.

 

Adjustable-rateloans decrease the risks to the Bank that are 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, which havenot had a material adverse effect on the Bank to date, generally are less thanthe risks associated with holding fixed-rate loans in an increasing interestrate environment.

 

The Bank hascontinued to originate a limited amount of fixed-rate mortgage loans with termsup to 30 years. The majority of the Bank’s fixed-rate loans with terms of over15 years are originated pursuant to commitments to sell such loans tocorrespondent mortgage banking institutions. Fixed-rate loans with terms of 15 years or less are generally originatedfor portfolio.  In addition, while theBank offers balloon loans with five, seven and ten year terms based on a 20 to30 year amortization schedule, the Bank has only originated a small amount ofsuch loans.

 

The Bank alsooffers home equity loans with fixed rates of interest and terms of 15 years orless.  The Bank does not require that ithold the first mortgage on the secured property; however, the balance on allmortgages on the secured property cannot exceed 90% of the value of the securedproperty.  At December 31, 2009, theBank held a first lien on a majority of the properties securing home equityloans from the Bank.   At December 31,2009, home equity loans and lines amounted to $21.4 million or 7.4% of thetotal loan portfolio, which are included in single family loans.

 

The Bank ispermitted to lend up to 100% of the appraised value of the real propertysecuring a residential loan; however, if the amount of a residential loanoriginated or refinanced exceeds 90% of the appraised value, the Bank isrequired by federal regulations to obtain private mortgage insurance on theportion of the principal amount that exceeds 80% of the appraised value of thesecurity property.  Pursuant tounderwriting guidelines adopted by the Board of Directors, the Bank may lend upto an 80% loan-to-value ratio without private mortgage insurance unless it isdetermined that additional collateral in the form of private mortgage insuranceor other acceptable collateral is needed. The Bank may lend up to a 90% loan-to-value ratio on a one or two familyowner-occupied residential property as long as additional collateral in theform of private mortgage insurance or other acceptable collateral enhancementsare obtained. Exceptions to this policy may be made to assist in the Bank’scommunity outreach efforts if deemed prudent by the Bank’s Management and withadditional collateral enhancements to reduce the risk inherent in the loan(s).

 

**Multi-FamilyResidential and Commercial Real Estate Loans**.  The Bankoriginates and, to a lesser extent, purchases mortgage loans for the acquisitionand refinancing of existing multi-family residential and commercial real estateproperties.  At December 31, 2009,$1.2 million or 0.4% of the Bank’s total loan portfolio consisted of loanssecured by existing multi-family residential real estate.  Commercial real estate loans increased from$123.5 million or 43.8% of the total loan portfolio at December 31, 2008to $131.9 million or 45.7% of the total loan portfolio at December 31,2009. Such increase was due to the Bank’s strategy to increase suchlending.  The Bank intends to 

 

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continue to placean increased emphasis on this type of lending.

 

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 commercial real estate loan portfolio.  The majority of the multi-family residentialand commercial real estate loan portfolio at December 31, 2009 was securedby properties located in the Bank’s primary market area.  The five largest loan relationships at December 31,2009 amounted to $6.5 million, $6.3 million, $6.0 million, $5.8 million and$5.6 million, respectively, all of which were performing in accordance withtheir terms and were current at such date.

 

Multi-family andcommercial real estate loans are made on terms up to 30 years, some of whichinclude call or balloon provisions ranging from five to 15 years.  The Bank will originate and purchase theseloans either with fixed interest rates or with interest rates which adjust inaccordance with a designated index.  Loanto value ratios on the Bank’s multi-family and commercial real estate loans aretypically limited to 80% of appraised value at the time the loan is granted.  As part of the criteria for underwritingmulti-family and commercial real estate loans, the Bank generally imposes adebt coverage ratio (the ratio of net cash from operations before payment ofdebt service to debt service) of not less than 1.15.  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 andcommercial real estate lending entails significant additional risks as comparedwith single-family residential property lending.  Such loans typically involve large loanbalances 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, 2009,the Bank had no non-performing multi-family loans and 13 non-performingcommercial real estate loans which amounted to $1.8 million.

 

**ConstructionLoans.**  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 31,2009, construction loans amounted to $24.6 million or 8.5% of the Bank’s totalloan portfolio, which consisted of $12.3 million of residential and $12.3million of 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 successful application, credit reviewand analysis of personal and corporate financial statements, the Bank willgrant local builders 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’scommercial construction loans are generally made to local developers and othersfor the purpose of developing commercial real estate properties such as smalloffice buildings and hotels, storage facilities and commercial buildingrenovations.  The application, creditreview and disbursement process are similar to those mentioned above for theBank’s residential construction loans.  The five largest real estate construction loans had outstanding balancesof $6.0 million, $3.7 million, $2.9 million, $2.0 million, and $1.7 million asof December 31, 2009.  The $6.0million loan is a land and development loan for a mixed use commercial realestate project located in Bradenton, Florida, and was classified as specialmention at December 31, 2009.  The$3.7 million loan was restructured in December of 2009, which managementconsiders to be a troubled debt restructuring, and was classified asnon-performing as of December 31, 2009. The $2.9 million and $1.7 million loans are residential constructionprojects located in Philadelphia, Pennsylvania and are both classified asspecial mention due to slower than anticipated sales.  The $2.0 million loan is a performingcommercial construction loan in Philadelphia..

 

The Bank’sconstruction loans generally have maturities of 12 to 36 months, with paymentsbeing made monthly on an interest-only basis. These interest payments are generally paid out of an interest reserve,which is established in connection with the origination of the loan.  Generally, such loans adjust monthly based onthe prime rate plus a margin of up to 2.0%. Residential and commercial realestate construction loans are generally made with maximum loan to value ratiosof 80% and 75%, respectively, on an as completed basis.  The Bank utilizes interest rate floors on allcommercial loans and lines of credit whenever possible.

 

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Constructionlending is generally considered to involve a higher level of risk as comparedto single-family residential lending, due to the concentration of principal ina limited number of loans and borrowers and the effects of general economicconditions on developers and builders. Moreover, a construction loan can involve additional risks because ofthe inherent difficulty in estimating both a property’s value at completion ofthe project and the estimated cost (including interest) of the project.  The nature of these loans is such that theyare generally more difficult to evaluate and monitor. In addition, speculativeconstruction loans to a builder are not necessarily pre-sold and thus pose agreater potential risk to the Bank than construction loans to individuals ontheir personal residences.

 

The Bank hasattempted to minimize the foregoing risks by, among other things, limiting thenumber of units built to two or three sample units plus any under agreement ofsale and 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, 2009, the Bank had onenon-performing construction loan which had an outstanding balance of $3.7million.  In December 2009, thisloan was restructured and management considers this a troubled debtrestructuring.

 

**ConsumerLoans**.  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 $7.6 million or 2.6% of the total loan portfolio at December 31,2009.  Student loans amounted to $7.1million or 2.5% of the total loan portfolio at December 31, 2009.  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 repaymentobligations do not begin until the student has completed his or hereducation.  The principal and interest onsuch loans is guaranteed by the U.S. Government.  Loans secured by deposit accounts amounted to$482,000 or 0.2% of the total loan portfolio at December 31, 2009.  Such loans are originated for up to 90% ofthe account balance, with a hold placed on the account restricting thewithdrawal of the account balance.

 

Consumer loansgenerally have shorter terms and higher interest rates than mortgage loans butgenerally involve more credit risk than mortgage loans because of the type andnature of the collateral and, in certain cases, the absence of collateral.  In addition, consumer lending collections aredependent on the borrower’s continuing financial stability, and thus are morelikely to be adversely effected by job loss, divorce, illness and personalbankruptcy.  In most cases, anyrepossessed collateral for a defaulted consumer loan will not provide anadequate source of repayment of the outstanding loan balance because ofimproper repair and maintenance of the underlying collateral.  The remaining deficiency often does notwarrant 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.  At December 31, 2009, there were 60non-performing student loans which amounted to $153,000, compared to 22non-performing student loans which amounted to $75,000 at December 31,2008.

 

**CommercialBusiness Loans.**  In September 1997, the Bank opened acommercial loan department to provide a full range of commercial loan productsto 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 $8.5 million or 2.9%of the total loan portfolio at December 31, 2009 and were primarilysecured by inventories and other business assets.

 

Althoughcommercial business loans generally are considered to involve greater creditrisk than other certain types of loans, management intends to continue to offercommercial business loans to small businesses located in its primary marketarea.  At December 31, 2009, theBank had 4 non-performing commercial business loans which amounted $472,000.

 

**Loan FeeIncome**.  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.

 

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**AssetQuality**

 

Loans are placedon non-accrual status when, in the judgment of management, the probability ofcollection of interest is deemed to be insufficient to warrant furtheraccrual.  When a loan is placed onnon-accrual status, previously accrued but unpaid interest is deducted frominterest income.  The Bank does notaccrue interest on real estate loans past due 90 days or more unless, in theopinion of management, the value of the property securing the loan exceeds theoutstanding balance of the loan (principal, interest and escrows) andcollection is probable.  The Bankprovides an allowance for accrued interest deemed uncollectible.  Such allowance amounted to approximately$138,000 at December 31, 2009 compared to $492,000 at December 31,2008. Accrued interest receivable is reported net of the allowance foruncollected interest.  Loans may bereinstated to accrual status when all payments are brought current and, in theopinion of management, collection of the remaining balance can be reasonablyexpected.

 

Real estateacquired by the Bank as a result of foreclosure or by deed-in-lieu offoreclosure is classified as other real estate owned (OREO) until sold and isinitially recorded at the fair value at the date of acquisition.   After the date of acquisition, all costsincurred in maintaining the property are expensed and costs incurred for theimprovement or development of such property are capitalized up to the extent oftheir fair value.  As of December 31,2009, the Bank had approximately $3.0 million in OREO.  The $3.0 million consists of one commercialproperty in the amount of $651,000, three improved building lots totaling$930,000, one unimproved lot in the amount of $38,000, and four single familyresidences totaling $1.4 million.  All ofthe properties are located within the Banks market area except one of thesingle family residences which is located in Tampa, Florida with a carryingvalue of $49,000.

 

Under accountingprinciples generally accepted in the United States of America (“GAAP”), theBank is required to account for certain loan modifications or restructurings as“troubled debt restructurings.”  Ingeneral, the modification or restructuring of a debt constitutes a troubleddebt restructuring if the Bank, for economic or legal reasons related to theborrower’s financial difficulties, grants a concession to the borrower that theBank would not otherwise consider.  Debtrestructurings or loan modifications for a borrower do not necessarily alwaysconstitute troubled debt restructurings, however, and troubled debtrestructurings do not necessarily result in non-accrual loans.  The Bank did not have any troubled debtrestructurings as of December 31, 2008. At December 31, 2009, theBank had one troubled debt restructuring construction loan which had anoutstanding balance of $3.7 million. Management decided to place the loan on non-accrual until the borrowershows the ability to pay in accordance with the restructured terms.

 

**DelinquentLoans**.  The following table sets forth informationconcerning delinquent loans at December 31, 2009, in dollar amounts and asa percentage 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          |       | $                          | 1,302      |                  | 1.13       | %                   | $          | 15 |   | 0.01 | % | $ | 1,706 |   | 1.48 | % |
| Multi-family           |       | —                     |       | —                |       | —              |       | — |   | — |   | — |   |
| Commercial             |       | 4,098                      |       | 3.11                  |       | 10                  |       | 0.01 |   | 1,768 |   | 1.34 |   |
| Land  and construction |       | 1,310                      |       | 5.33                  |       | —              |       | — |   | 3,728 |   | 15.17 |   |
| Commercial  business   |       | 25                         |       | 0.30                  |       | 50                  |       | 0.59 |   | 422 |   | 4.99 |   |
| Consumer               |       | 143                        |       | 1.88                  |       | 94                  |       | 1.23 |   | 153 |   | 2.01 |   |
|                   |       |                       |       |                  |       |                |       |   |   |   |   |   |   |
| Total                  |       | $                          | 6,878      |                  |       |                | $          | 169 |   |   |   | $ | 7,777 |   |   |   |

 

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The following table sets forth the amounts and categories of the Bank’snon-performing assets at the dates indicated.

 
| ** **                                                   | ** ** | **December 31,**                | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                   | ** ** | **2009**                             | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                   | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Non-accruing loans:                                          |       |                                 |       |   |   |   |   |   |   |   |   |
| Real estate:                                                 |       |                                 |       |   |   |   |   |   |   |   |   |
| Single-family                                                |       | $                                    | 479        |   | $ | 762 |   | $ | 1,086 |   | $ | 874 |   | $ | 762 |   |
| Multi-family                                                 |       | —                               |       | — |   | — |   | — |   | — |   |
| Commercial                                                   |       | 1,778                                |       | 3,551 |   | 416 |   | — |   | 222 |   |
| Land and construction                                        |       | 3,728                                |       | 896 |   | — |   | — |   | — |   |
| Commercial business                                          |       | 472                                  |       | — |   | — |   | — |   | — |   |
| Consumer                                                     |       | —                               |       | — |   | — |   | — |   | — |   |
| Total non-accruing  loans                                    |       | 6,457                                |       | 5,209 |   | 1,502 |   | 874 |   | 984 |   |
|                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Accruing loans 90 days  or more delinquent:                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Real estate:                                                 |       |                                 |       |   |   |   |   |   |   |   |   |
| Single-family                                                |       | 1,227                                |       | 1,712 |   | 563 |   | 649 |   | 942 |   |
| Multi-family                                                 |       | —                               |       | — |   | — |   | — |   | — |   |
| Commercial                                                   |       | —                               |       | — |   | — |   | — |   | — |   |
| Land and construction                                        |       | —                               |       | — |   | — |   | — |   | — |   |
| Commercial business                                          |       | —                               |       | — |   | — |   | — |   | — |   |
| Consumer                                                     |       | 153                                  |       | 75 |   | 32 |   | 36 |   | 14 |   |
| Total accruing loans 90  days or more delinquent             |       | 1,380                                |       | 1,787 |   | 595 |   | 685 |   | 956 |   |
|                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Total non-performing  loans                                  |       | 7,837                                |       | 6,996 |   | 2,097 |   | 1,559 |   | 1,940 |   |
|                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Other real estate  owned:                                    |       |                                 |       |   |   |   |   |   |   |   |   |
| Real estate acquired  through, or in lieu of, foreclosure    |       | 2,968                                |       | — |   | — |   | — |   | 1,795 |   |
| Real estate held for  development                            |       | —                               |       | — |   | — |   | — |   | — |   |
| Total other real estate  owned                               |       | 2,968                                |       | — |   | — |   | — |   | 1,795 |   |
|                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Total non-performing  assets                                 |       | $                                    | 10,805     |   | $ | 6,996 |   | $ | 2,097 |   | $ | 1,559 |   | $ | 3,735 |   |
|                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Total non-performing  loans as a percentage of total loans   |       | 2.71                                 | %          | 2.48 | % | 0.81 | % | 0.65 | % | 0.85 | % |
|                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Total non-performing  assets as a percentage of total assets |       | 2.33                                 | %          | 1.65 | % | 0.49 | % | 0.38 | % | 0.96 | % |

 

If the Bank’s $6.5 million of non-accruing loans at December 31,2009 had been current in accordance with their terms during 2009, the grossincome on such loans would have been approximately $335,000 for 2009.  The Bank actually recorded $136,000 ininterest income on such loans for 2009. If the Bank’s $5.2 million of non-accruing loans at December 31,2008 had been current in accordance with their terms during 2008, the grossincome on such loans would have been approximately $347,000 for 2008.  The Bank actually recorded $121,000 ininterest income on such loans for 2008. Loans are placed on non-accrual when interest past due exceeds 90 days,unless the loan is well secured and in the process of collection.

 

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The Bank’s nonperforming assets, which consist of nonaccruing loans,accruing loans 90 days or more delinquent and other real estate owned (whichincludes real estate acquired through, or in lieu of, foreclosure) increased to$10.8 million or 2.33% of total assets at December 31, 2009 from $7.0million or 1.65% of total assets at December 31, 2008.  At December 31, 2009, the Bank’s $10.8million of nonperforming assets consisted of $1.4 million of accruing loans 90days or more delinquent, $6.4 million of nonaccrual loans and $3.0 million inother real estate owned. At December 31, 2009, nonperforming loansconsisted of $1.7 million in single-family residential real estate loans, $1.8million in commercial real estate loans, $3.7 million in a residential realestate construction loan, $472,000 in commercial business loans, and $153,000in consumer and other loans.  The $1.8million of nonperforming commercial real estate loans consists of 13 loans to 7borrowers that are the result of cash flow stress primarily due to the currenteconomic conditions.  The Bank’smanagement continues to aggressively pursue the collection and resolution ofall delinquent loans.

 

**ClassifiedAssets.**  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 regulatory classificationsfor problem assets: “substandard,” “doubtful” and “loss.”  Substandard assets have one or more definedweaknesses and are characterized by the distinct possibility that the insuredinstitution will sustain 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 have a weakness but do not currently expose aninsured institution to a sufficient degree of risk to warrant classification assubstandard, doubtful or loss.

 

At December 31, 2009, the Bank had $20.3 million of classifiedassets, of which $12.6 million consisted of loans classified as specialmention, $7.7 million consisted of loans classified as substandard, and noloans classified as doubtful.  The $12.6million of loans classified as special mention consisted of $787,000 incommercial real estate loans and $11.8 million in real estate constructionloans.  The $11.8 million includes fourresidential real estate construction loans to three borrowers amounting to $4.2million and two commercial real estate construction loans amounting to $7.6million at December 31, 2009.  Allof these loans are located in the Bank’s primary market except for one mixeduse commercial real estate project located in Bradenton, Florida, which havebeen classified as special mention primarily due to slower than anticipatedsales.  The $7.7 million of loansdesignated as substandard consisted of $1.7 million of single-family realestate loans, $1.5 million in commercial real estate loans, $3.7 million inconstruction real estate, and $472,000 in commercial business loans.  The $3.7 million real estate constructionloan represents 16 remaining substantially completed residential condominiumunits located in center city Philadelphia and was restructured in December of2009,  which management considers to be atroubled debt restructuring.  The Companydoes not knowingly lend to subprime borrowers, except as disclosed in“Origination, Purchase and Sale of Loans”, and has not been materially directlyimpacted by the current subprime crisis as of December 31, 2009.

 

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

 

General loan lossreserves are established as an allowance for losses based on inherent probablerisk of loss in the loan portfolio.  Inassessing risk, management considers historical experience, volume andcomposition of lending conducted by the Bank, industry standards, status 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.

 

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Although management usesthe best information available to make determinations with respect to theprovisions for loan losses, additional provisions for loan losses may berequired to be established in the future should economic or other conditionschange substantially.  In addition, thePennsylvania Department of Banking and the FDIC, as an integral part of theirexamination process, periodically review the Bank’s allowance for loanlosses.  Such agencies may require theBank to recognize additions to such allowance based on their judgments aboutinformation 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,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                               | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                               | ** ** | **(Dollars in Thousands)**        | ** ** |
|                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Average loans  receivable, net (1)                       |       | $                                 | 283,736    |   | $ | 271,849 |   | $ | 247,157 |   | $ | 232,520 |   | $ | 218,036 |   |
|                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Allowance for loan  losses, beginning of year            |       | $                                 | 3,169      |   | $ | 2,831 |   | $ | 2,720 |   | $ | 2,671 |   | $ | 2,608 |   |
| Provision for loan  losses                               |       | 528                               |       | 585 |   | 120 |   | 60 |   | 120 |   |
| Charge-offs:                                             |       |                              |       |   |   |   |   |   |   |   |   |
| Single-family residential                                |       | —                            |       | (3 | ) | (3 | ) | — |   | — |   |
| Multi-family  residential                                |       | (6                                | )          | — |   | — |   | — |   | — |   |
| Commercial real estate                                   |       | (153                              | )          | (350 | ) | — |   | — |   | (86 | ) |
| Land and construction                                    |       | —                            |       | — |   | — |   | — |   | — |   |
| Consumer                                                 |       | (1                                | )          | (13 | ) | (11 | ) | (14 | ) | (9 | ) |
| Commercial business                                      |       | —                            |       | — |   | — |   | — |   | — |   |
| Total charge-offs                                        |       | (160                              | )          | (366 | ) | (14 | ) | (14 | ) | (95 | ) |
| Recoveries:                                              |       |                              |       |   |   |   |   |   |   |   |   |
| Single-family  residential                               |       | —                            |       | — |   | — |   | — |   | — |   |
| Multi-family  residential                                |       | —                            |       | — |   | — |   | — |   | — |   |
| Commercial real estate                                   |       | —                            |       | 114 |   | — |   | — |   | 37 |   |
| Land and construction                                    |       | —                            |       | — |   | — |   | — |   | — |   |
| Consumer                                                 |       | 1                                 |       | 5 |   | 5 |   | 3 |   | 1 |   |
| Commercial business                                      |       | —                            |       | — |   | — |   | — |   | — |   |
| Total recoveries                                         |       | 1                                 |       | 119 |   | 5 |   | 3 |   | 38 |   |
|                                                     |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for loan  losses, end of year                  |       | $                                 | 3,538      |   | $ | 3,169 |   | $ | 2,831 |   | $ | 2,720 |   | $ | 2,671 |   |
|                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Net charge-offs to  average loans receivable, net        |       | 0.06                              | %          | 0.09 | % | 0.00 | % | 0.01 | % | 0.03 | % |
|                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Allowance for loan  losses to total loans receivable     |       | 1.23                              | %          | 1.13 | % | 1.09 | % | 1.14 | % | 1.18 | % |
|                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Allowance for loan  losses to total non-performing loans |       | 45.14                             | %          | 45.30 | % | 135.00 | % | 174.39 | % | 137.63 | % |
|                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Net charge-offs to  allowance for loan losses            |       | 4.49                              | %          | 7.79 | % | 0.32 | % | 0.40 | % | 2.13 | % |

 

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(1) Includes loans held for sale, if any.

 

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The following tablepresents the allocation of the allowance for loan losses to the total amount ofloans in each category listed at the dates indicated.

 
|                      |   | **December 31,**      |       |
|---------------------------|--------|----------------------------|------------|
|                      |   | **2009**                   |       | **2008** |   | **2007** |   | **2006** |   | **2005** |   |
|                      |   | **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 |   | $                          | 588        |   | 39.82 | % | $ | 322 |   | 41.43 | % | $ | 391 |   | 42.92 | % | $ | 445 |   | 45.48 | % | $ | 462 |   | 45.79 | % |
| Multi-family residential  |   | 16                         |       | 0.43 |   | 16 |   | 0.46 |   | 17 |   | 0.64 |   | 25 |   | 0.87 |   | 28 |   | 0.98 |   |
| Commercial real estate    |   | 1,985                      |       | 45.68 |   | 1,786 |   | 43.84 |   | 1,713 |   | 47.24 |   | 1,691 |   | 45.39 |   | 1,698 |   | 46.52 |   |
| Land and construction     |   | 735                        |       | 8.51 |   | 856 |   | 8.97 |   | 556 |   | 5.61 |   | 416 |   | 4.94 |   | 322 |   | 3.26 |   |
| Consumer                  |   | 27                         |       | 2.63 |   | 16 |   | 2.11 |   | 8 |   | 0.91 |   | 9 |   | 1.02 |   | 12 |   | 1.36 |   |
| Commercial business       |   | 187                        |       | 2.93 |   | 173 |   | 3.19 |   | 146 |   | 2.67 |   | 134 |   | 2.30 |   | 149 |   | 2.09 |   |
| Total                     |   | $                          | 3,538      |   | 100.00 | % | $ | 3,169 |   | 100.00 | % | $ | 2,831 |   | 100.00 | % | $ | 2,720 |   | 100.00 | % | $ | 2,671 |   | 100.00 | % |

 

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**InvestmentActivities**

 

**Mortgage-BackedSecurities.**  Mortgage-backed securities (which also areknown as mortgage participation certificates or pass-through certificates)represent a participation interest in a pool of single-family or multi-familymortgages, the principal and interest payments on which are passed from themortgage originators, through intermediaries (generally U.S. Governmentagencies and government sponsored enterprises) that pool and repackage theparticipation interests in the form of securities, to investors such as theBank.  Such U.S. Government agencies andgovernment sponsored enterprises, which guarantee the payment of principal andinterest to investors, primarily include the FHLMC, the FNMA and the GovernmentNational Mortgage Association (“GNMA”).

 

The FHLMC is a public corporation chartered by the U.S.Government.  The FHLMC issuesparticipation certificates backed principally by conventional mortgageloans.  The FHLMC guarantees the timelypayment of interest 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 FNMAsecurities.  FHLMC and FNMA securitiesare not backed by the full faith and credit of the United States, but becausethe FHLMC and the FNMA are U.S. Government sponsored enterprises, thesesecurities are considered high quality investments with minimal creditrisks.  The GNMA is a government agencywithin the Department of Housing and Urban Development which is intended to helpfinance government 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-backedsecurities typically are issued with stated principal amounts, and thesecurities are backed by pools of mortgages that have loans with interest ratesthat 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 followingtable sets forth the fair value of the Bank’s mortgage-backed securitiesportfolio designated as available for sale at the dates indicated.

 
| ** **                       | ** ** | **December 31,**   | ** ** |
|----------------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | **2009**                | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                       | ** ** | **(In Thousands)** | ** ** |
|                             |       |                    |       |   |   |   |   |
| Mortgage-backed securities:      |       |                    |       |   |   |   |   |
|                             |       |                    |       |   |   |   |   |
| FNMA pass-through certificates   |       | $                       | 12,336     |   | $ | 16,788 |   | $ | 21,060 |   |
| FHLMC pass-through certificates  |       | 8,798                   |       | 12,641 |   | 10,872 |   |
| GNMA pass-through certificates   |       | 2,221                   |       | 2,492 |   | 3,700 |   |
|                             |       |                    |       |   |   |   |   |
| Total mortgage-backed securities |       | $                       | 23,355     | (1) | $ | 31,921 | (2) | $ | 35,632 | (3) |

 

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| (1) | At December 31,  2009, gross unrealized gains on such securities amounted to $907,000 and  gross unrealized losses amounted to $15,000.  |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | At December 31,  2008, gross unrealized gains on such securities amounted to $738,000 and  gross unrealized losses amounted to $157,000. |
| (3) | At December 31,  2007, gross unrealized gains on such securities amounted to $267,000 and  gross unrealized losses amounted to $232,000. |

 

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The followingtable sets forth the purchases, sales and principal repayments of the Bank’smortgage-backed securities for the periods indicated.

 
| ** **                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                           | ** ** | **(In Thousands)**               | ** ** |
|                                 |       |                             |       |   |   |   |   |
| Mortgage-backed securities purchased |       | $                                | —     |   | $ | 4,340 |   | $ | — |   |
| Mortgage-backed securities sold      |       | —                           |       | — |   | — |   |
| Principal repayments                 |       | (8,876                           | )          | (8,258 | ) | (8,959 | ) |
| Other, net                           |       | 310                              |       | 207 |   | 955 |   |
|                                 |       |                             |       |   |   |   |   |
| Net decrease                         |       | $                                | (8,566     | ) | $ | (3,711 | ) | $ | (8,004 | ) |

 

Mortgage-backedsecurities generally increase the quality of the Bank’s assets by virtue of theinsurance or guarantees that back them, they are more liquid than individualmortgage loans and may be used to collateralize borrowings or other obligationsof the Bank.  At December 31, 2009, $3.1million of the Bank’s mortgage-backed securities were pledged to secure variousobligations of the Bank.  See Note 4 tothe Consolidated Financial Statements in Item 8.  The Company does not knowingly invest insubprime financial instruments, and has not been materially impacted by thecurrent subprime crisis as of December 31, 2009.

 

Informationregarding the contractual maturities and weighted average yield of the Bank’smortgage-backed securities portfolio at December 31, 2009 is presentedbelow.

 
| ** **                      | ** ** | **December 31, 2009** | ** ** |
|---------------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **One Year  or Less**      | ** ** | **After One to  Five Years** | ** ** | **After Five   to 15 Years** | ** ** | **Over 15  Years** | ** ** | **Total** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)** | ** ** |
|                            |       |                       |       |   |   |   |   |   |   |   |   |
| FHLMC pass-through certificates |       | —                     |       | $ | 2,678 |   | $ | 3,033 |   | $ | 2,668 |   | $ | 8,379 |   |
| FNMA pass-through certificates  |       | $                          | 456        |   | 1,902 |   | 7,919 |   | 1,666 |   | 11,943 |   |
| GNMA pass-through certificates  |       | —                     |       | — |   | — |   | 2,142 |   | 2,142 |   |
| Total                           |       | $                          | 456        |   | $ | 4,580 |   | $ | 10,952 |   | $ | 6,476 |   | $ | 22,464 | (1) |
|                            |       |                       |       |   |   |   |   |   |   |   |   |
| Weighted average yield          |       | 2.08                       | %          | 4.18 | % | 5.07 | % | 3.49 | % | 4.76 | % |

 

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

 

The actualmaturity of a mortgage-backed security is typically less than its statedmaturity 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 actualprepayments.  Although prepayments ofunderlying mortgages depend on many factors, including the type of mortgages,the coupon rate, the age of mortgages, the geographical location of theunderlying real estate collateralizing the mortgages and general levels ofmarket interest rates, the difference between the interest rates on theunderlying mortgages and the prevailing mortgage interest rates generally isthe most significant determinant of the rate of prepayments.  During periods of falling mortgage interestrates, if the coupon rate of the underlying mortgages exceeds the prevailingmarket interest rates offered for mortgage loans, refinancing 

 

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generallyincreases and accelerates the prepayment of the underlying mortgages and therelated security.  Under suchcircumstances, the Bank may be subject to reinvestment risk because to theextent that the Bank’s mortgage-backed securities amortize or prepay fasterthan anticipated, the Bank may not be able to reinvest the proceeds of suchrepayments and prepayments at a comparable rate.  During periods of rising interest rates,prepayment of the underlying mortgages generally slow down when the coupon rateof such mortgages is less than the prevailing market rate.  The Bank may be subject to extension riskwhen this occurs.

 

**InvestmentSecurities.**  The investment policy of the Bank, asestablished by the Board of Directors, is designed primarily to provide andmaintain liquidity and to generate a favorable return on investments withoutincurring undue interest rate risk, credit risk, and investment portfolio assetconcentrations.  The Bank’s investmentpolicy takes into account the Bank’s business plan, interest rate management,the current economic environment, the types of securities to be held and othersafety and soundness considerations.  TheBank’s investment policy is currently implemented by the Chief ExecutiveOfficer and reviewed and evaluated by the Asset Liability Committee.  The Asset Liability Committee is required toissue a written compliance report to the Board of Directors at least quarterly.

 

The Bank is authorized toinvest in obligations issued or fully guaranteed by the U.S. Government,certain federal agency obligations, insured municipal obligations, certainmutual funds, investment grade corporate debt securities and other specifiedinvestments.  At December 31, 2009,the Bank’s investment securities amounted to $52.3 million, of which $28.9million was designated as available for sale and $23.4 million was designatedas held to maturity.  The Bank hasdesignated the majority of its investment securities as available for sale inorder to respond to changes in market rates, increases in loan demand, andchanges in liquidity needs.

 

The followingtable sets forth certain information relating to the Bank’s investmentsecurities portfolio at the dates indicated.

 
| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2009**              | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                           | ** ** | **Amortized  Cost**   | ** ** | **Fair********Value** | ** ** | **Amortized  Cost** | ** ** | **Fair********Value** | ** ** | **Amortized  Cost** | ** ** | **Fair********Value** | ** ** |
| ** **                           | ** ** | **(In Thousands)**    | ** ** |
|                                 |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government andagency securities |       | $                     | 28,995     |   | $ | 28,890 |   | $ | 37,448 |   | $ | 37,814 |   | $ | 26,335 |   | $ | 26,472 |   |
|                                 |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Municipal obligations                |       | 23,446                |       | 23,796 |   | 24,256 |   | 23,958 |   | 22,247 |   | 22,827 |   |
| Mutual funds (2)                     |       | —                |       | — |   | — |   | — |   | 19,142 |   | 19,142 |   |
|                                 |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Total                                |       | $                     | 52,441     | (1) | $ | 52,686 | (1) | $ | 61,704 |   | $ | 61,772 |   | $ | 67,724 |   | $ | 68,441 |   |
|                                      |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| (1)    | At December 31,  2009, investment securities with an amortized cost totaling $29.0 million  were designated as available for sale. At December 31, 2009, gross  unrealized losses amounted to $215,000 and there were $110,000 in gross  unrealized gains. At December 31, 2009, $12.0 million or 22.9% of the  Bank’s investment securities were pledged to secure various obligations of  the Bank. See Note 3 to the Consolidated Financial Statements in Item 8.                                                                                                                                                        |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (2)    | During 2008, the  Company recognized $882,000 in impairment charges on these mutual funds  compared to an $860,000 impairment in 2007. The Company attributes the lower  valuations of these mutual funds to a significant widening of spreads  primarily due to the mortgage-related securities underlying these funds. This  spread differential is primarily due to the general lack of investor interest  for these type of securities in the current market environment. On  August 20, 2008, subsequent to recording the impairment charges, the  Company sold these mutual funds to Alliance Mutual Holding Company at fair  value. |

 

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Informationregarding the contractual maturities and weighted average yield of the Bank’sinvestment securities portfolio at December 31, 2009 is presentedbelow.  Actual maturities may differ fromcontractual maturities because issuers may have the right to call or prepayobligations with or without call or prepayment penalties.

 
| ** **                            | ** ** | **At December 31, 2009** | ** ** |
|---------------------------------------|------------|-------------------------------|------------|
| ** **                            | ** ** | **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 |       | $                             | 1,000      |   | $ | 1,000 |   | $ | 10,996 |   | $ | 15,999 |   | $ | 28,995 | (1) |
| Municipal obligations                 |       | —                        |       | — |   | 4,316 |   | 19,130 |   | 23,446 | (2) |
| Total                                 |       | $                             | 1,000      |   | $ | 1,000 |   | $ | 15,312 |   | $ | 35,129 |   | $ | 52,441 |   |
|                                  |       |                          |       |   |   |   |   |   |   |   |   |
| Weighted average yield                |       | 1.20                          | %          | 2.00 | % | 4.13 | % | 4.47 | % | 4.26 | % |

 

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(1) The $29.0million of U.S. Government agency securities are designated as available forsale.

(2) The $23.4million of municipal obligations are designated as held to maturity and are taxexempt.

 

FHLB stock is arestricted investment security, carried at cost.  The purchase of FHLB stock provides bankswith the right to be a member of the FHLB and to receive the products andservices that the FHLB provides to member banking institutions.  Unlike other types of stock, FHLB stock isacquired primarily for the right to receive advances from the FHLB, rather thanthe for the purpose of mixing of mixing dividends or stock growth.  FHLB is an activity based stock directlyproportional to the volume of advances taken by a member institution.  During the fourth quarter of 2008, the FHLBannounced a decision to suspend the dividend on, and restrict the repurchaseof, FHLB stock.  The FHLB’s suspension ofdividends and restrictions on repurchases is continuing and, as a result, wemust hold these securities, although we are not currently receiving a returnfor this investment.

 

**Sourcesof Funds**

 

**General**. Deposits are the primary source of the Bank’s funds for lending andother investment purposes.  In additionto deposits, the Bank derives funds from loan principal repayments, prepaymentsand advances from the Federal Home Loan Bank (“FHLB”) of Pittsburgh andproceeds from sales of investment securities. 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 broad selection of depositinstruments, including NOW accounts, money market accounts, regular savingsaccounts and term certificate accounts. Deposit account terms vary, with the principal difference being theminimum balance required, the time periods the funds must remain on deposit andthe interest rate.

 

The Bank considersits primary market area to be Delaware and Chester counties, Pennsylvania.  The Bank attracts deposit accounts byoffering a wide variety of accounts, competitive interest rates, and convenientoffice locations and service hours.  Inaddition, the Bank maintains automated teller machines at its Broomall,Concordville, Havertown, Springfield, Lansdowne, Paoli, and Secaneoffices.  The Bank utilizes traditionalmarketing methods to attract new customers and savings deposits, includingprint media advertising and direct mailings. The Bank does not advertise for deposits outside of its primary marketarea or utilize the services of deposit brokers, and management believes thatan insignificant number of deposit accounts were held by non-residents ofPennsylvania at December 31, 2009.

 

The Bank has beencompetitive in the types of accounts and in interest rates it has offered onits deposit products but does not necessarily seek to match the highest ratespaid by competing institutions.  Althoughmarket demand generally dictates which deposit maturities and rates will beaccepted by the public, the Bank intends to continue to promote longer termdeposits to the extent possible and consistent with its asset and liabilitymanagement goals.

 

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The followingtable shows the distribution of, and certain other information relating to, theBank’s deposits by type of deposit as of the dates indicated.

 
| ** **                              | ** ** | **December 31,**   | ** ** |
|-----------------------------------------|------------|-------------------------|------------|
| ** **                              | ** ** | **2009**                | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                              | ** ** | **Amount**              | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                              | ** ** | **(In Thousands)** | ** ** |
|                                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Passbook and statement savings accounts |       | $                       | 40,892     |   | 10.81 | % | $ | 39,378 |   | 11.87 | % | $ | 38,223 |   | 11.56 | % |
| Money market accounts                   |       | 21,733                  |       | 5.74 |   | 22,501 |   | 6.78 |   | 25,105 |   | 7.59 |   |
| Certificates of deposit                 |       | 251,583                 |       | 66.50 |   | 207,943 |   | 62.69 |   | 201,860 |   | 60.90 |   |
| NOW and Super NOW accounts              |       | 48,609                  |       | 12.85 |   | 48,269 |   | 14.55 |   | 48,760 |   | 12.81 |   |
| Non-interest bearing accounts           |       | 15,506                  |       |  4.10 |   | 13,610 |   | 4.10 |   | 16,840 |   | 7.14 |   |
|                                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Total deposits at end of year           |       | $                       | 378,323    |   | 100.00 | % | $ | 331,701 |   | 100.00 | % | $ | 330,788 |   | 100.00 | % |

 

The followingtable sets forth the net deposit flows of the Bank during the periodsindicated.

 
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                   | ** ** | **(In Thousands)**                    | ** ** |
|                                         |       |                                       |       |   |   |   |   |
| Increase (decrease) before interest credited |       | $                                          | 37,085     |   | $ | (10,839 | ) | $ | (14,632 | ) |
| Interest credited                            |       | 9,537                                      |       | 11,752 |   | 11,618 |   |
| Net deposit increase (decrease)              |       | $                                          | 46,622     |   | $ | 913 |   | $ | (3,014 | ) |

 

The followingtable sets forth maturities of the Bank’s certificates of deposit of $100,000or more at December 31, 2009 by time remaining to maturity.

 
| ** **                            | ** ** | **In Thousands** | ** ** |
|---------------------------------------|------------|------------------|------------|
|                                  |       |             |       |
| Three months or less                  |       | $                | 12,059     |   |
| Over three months through six months  |       | 19,695           |       |
| Over six months through twelve months |       | 14,395           |       |
| Over twelve months                    |       | 10,867           |       |
| Total                                 |       | $                | 57,016     |   |

 

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

 
| ** **                              | ** ** | **December 31,**                | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **2009**                             | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                              | ** ** | **Average  Balance**                 | ** ** | **Average  Rate   Paid** | ** ** | **Average  Balance** | ** ** | **Average  Rate   Paid** | ** ** | **Average  Balance** | ** ** | **Average  Rate   Paid** | ** ** |
| ** **                              | ** ** | **(Dollars in Thousands)** | ** ** |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Passbook and statement Savings accounts |       | $                                    | 40,412     |   | 0.55 | % | $ | 39,155 |   | 0.55 | % | $ | 38,212 |   | 0.75 | % |
| Money market accounts                   |       | 20,673                               |       | 0.79 |   | 22,979 |   | 1.59 |   | 25,105 |   | 2.75 |   |
| Certificates of deposit                 |       | 227,821                              |       | 2.93 |   | 203,122 |   | 3.94 |   | 201,860 |   | 4.73 |   |
| NOW and Super NOW                       |       | 46,958                               |       | 0.50 |   | 49,201 |   | 1.50 |   | 48,771 |   | 2.66 |   |
| Non-interest bearing accounts           |       | 14,797                               |       | — |   | 15,731 |   | — |   | 16,840 |   | — |   |
| Total average deposits                  |       | $                                    | 350,661    |   | 2.17 | %(1) | $ | 330,188 |   | 2.97 | %(1) | $ | 330,788 |   | 3.75 | %(1) |

 

----

(1) Reflectsaverage rate paid on total interest bearing deposits.

 

The following table presents, by various interest ratecategories, the amount of certificates of deposit at December 31, 2009 and2008 and the amounts at December 31, 2009, which mature during the periodsindicated.

 
| **Certificates of**           | ** ** | **December 31,** | ** ** | **Amounts at December 31,  2009  Maturing Within** | ** ** |
|-------------------------------|------------|-----------------------|------------|---------------------------------------------------------|------------|
| **Deposit**                   | ** ** | **2009**              | ** ** | **2008**                                                | ** ** | **One Year** | ** ** | **Two Years** | ** ** | **Three Years** | ** ** | **Thereafter** | ** ** |
| ** **                    | ** ** | **(In Thousands)**    | ** ** |
|                          |       |                  |       |                                                    |       |   |   |   |   |   |   |   |   |
| 2.0% or less                  |       | $                     | 94,571     |                                                    | $          | 1,095 |   | $ | 78,713 |   | $ | 15,649 |   | $ | 209 |   | $ | — |   |
| 2.01% to 4.0%                 |       | 140,949               |       | 175,533                                                 |       | 115,986 |   | 18,248 |   | 3,959 |   | 2,756 |   |
| 4.01% to 6.0%                 |       | 16,063                |       | 31,315                                                  |       | 5,413 |   | 9,163 |   | 1,064 |   | 423 |   |
| Total certificates of deposit |       | $                     | 251,583    |                                                    | $          | 207,943 |   | $ | 200,112 |   | $ | 43,060 |   | $ | 5,232 |   | $ | 3,179 |   |

 

**Borrowings**. The Bank may obtain advances from the FHLB of Pittsburgh upon thesecurity of the common stock it owns in that bank and certain of its loans,provided certain standards related to creditworthiness have been met. Such advancesare made pursuant to several credit programs, each of which has its owninterest rate and range of maturities. Such advances are generally available to meet seasonal and otherwithdrawals of deposit accounts and to permit increased lending.  At December 31, 2009, the Bank had $32.0million of advances from the FHLB of Pittsburgh.  Of the $32.0 million of FHLB advances at December 31,2009, $6.0 million was repaid in February 2010 with the remaining $26.0million maturing in the second and third quarters of 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 6.31% at December 31, 2009.  The Bank is reviewing its continuedutilization of advances from the FHLB as a source of funding based upondecisions by the FHLB to suspend the dividend on, and restrict the repurchaseof, FHLB stock.  FHLB stock is requiredto be held when advances from the FHLB are taken.  At December 31, 2009, the Bank had $2.4million of FHLB stock.

 

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

 
| ** **                                                   | ** ** | **At or for the Year Ended  December 31,** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                   | ** ** | **2009**                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                   | ** ** | **(Dollars in Thousands)**                      | ** ** |
|                                                         |       |                                            |       |   |   |   |   |
| FHLB of Pittsburgh advances:                                 |       |                                            |       |   |   |   |   |
| Average balance outstanding                                  |       | $                                               | 34,767     |   | $ | 37,000 |   | $ | 37,153 |   |
| Maximum amount outstanding at any month-end during  the year |       | 37,000                                          |       | 37,100 |   | 37,170 |   |
| Balance outstanding at end of year                           |       | 32,000                                          |       | 37,000 |   | 37,000 |   |
| Weighted average interest rate during the year               |       | 6.39                                            | %          | 6.30 | % | 6.37 | % |
|                                                         |       |                                            |       |   |   |   |   |
| Weighted average interest rate at end of year                |       | 6.31                                            | %          | 6.30 | % | 6.30 | % |
|                                                         |       |                                            |       |   |   |   |   |
| Total borrowings:                                            |       |                                            |       |   |   |   |   |
| Average balance outstanding                                  |       | $                                               | 34,811     |   | $ | 37,815 |   | $ | 37,356 |   |
| Maximum amount outstanding at any month-end during  the year |       | 37,082                                          |       | 39,812 |   | 38,975 |   |
| Balance outstanding at end of year                           |       | 32,021                                          |       | 37,198 |   | 37,042 |   |
| Weighted average interest rate during the year               |       | 6.38                                            | %          | 6.27 | % | 6.37 | % |
| Weighted average interest rate at end of year                |       | 6.31                                            | %          | 6.30 | % | 6.34 | % |

 

**Employees**

 

The Bank had 74full-time employees and 29 part-time employees at December 31, 2009.  None of these employees is represented by acollective bargaining agreement, 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.was formed 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. currentlymanages certain investments for the Bank, which, as of December 31, 2009and 2008, amounted to $57.5 million and $55.9 million, respectively.  Alliance Financial and Investment ServicesLLC was established in 2003 to share in commission fees from non-insuredalternative 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 customer service product mix and its ability toprovide a rate of return, liquidity and risk comparable to that offered bycompeting investment opportunities.

 

The Bankexperiences strong competition for real estate loans principally from othersavings associations, 

 

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commercial banksand mortgage banking companies.  The Bankcompetes for loans principally through the interest rates and loan fees itcharges and the efficiency and quality of services it provides borrowers.

 

**REGULATION**

 

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

 

Alliance Bank is a Pennsylvania-charteredsavings bank and is subject to extensive regulation and examination by thePennsylvania Department of Banking and by the FDIC, and is also subject tocertain 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.

 

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

 

**Regulation of Alliance Bank**

 

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

 

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

 

The Department generallyexamines each savings bank not less frequently than once every two years.  The Department may accept the examinationsand reports of the FDIC in lieu of its own examination, the present practice isfor the Department to alternate with the FDIC. The Department may order any savings bank to discontinue any violationof law or unsafe or unsound business practice and may direct any trustee,officer, attorney or employee of a savings bank engaged in an objectionableactivity, after the Department has ordered the activity to be terminated, toshow cause at a hearing before the Department why such person should not beremoved.

 

**Emergency Economic Stabilization Actof 2008.** The U.S.Congress adopted, and on October 3, 2008, President George W. Bush signed,the Emergency Economic Stabilization Act of 2008 (“EESA”) which authorizes theUnited States Department of the Treasury, to purchase from financialinstitutions and their holding companies up to $700 billion in mortgage loans,mortgage-related securities and certain other financial instruments, includingdebt and equity securities issued by financial institutions and their holdingcompanies in a troubled asset relief program. The purpose of the troubled assetrelief program is to restore confidence and stability to the U.S. banking systemand to encourage financial institutions to increase their lending to customersand to each other. The troubled asset relief program is also expected toinclude direct purchases or guarantees of troubled assets of financialinstitutions. The 

 

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Treasury Department has allocated $250 billion towardsa capital purchase program. Under the capital purchase program, the TreasuryDepartment will purchase debt or equity securities from participatinginstitutions. We have elected not to participate in the TARP or capitalpurchase program.

 

The Federal Deposit Insurance Corporation increaseddeposit insurance on most accounts from $100,000 to $250,000, until the end of2013. In addition, pursuant to Section 13(c)(4)(G) of the FederalDeposit Insurance Act, the Federal Deposit Insurance Corporation hasimplemented two temporary programs to provide deposit insurance for the fullamount of most non-interest bearing transaction deposit accounts through June 30,2010 and to guarantee certain unsecured debt of financial institutions andtheir holding companies through the end of 2012. For non-interest bearingtransaction deposit accounts, including accounts swept from a non-interestbearing transaction account into a non-interest bearing savings depositaccount, a 10 basis point annual rate surcharge will be applied to depositamounts in excess of $250,000. Financial institutions could have opted out ofeither or both these two programs. We did not opt out of the temporaryliquidity guarantee program; however, we do not expect that the assessmentsurcharge will have a material impact on our results of operations.

 

**Insurance of Accounts**. The deposits of Alliance Bank areinsured to the maximum extent permitted by the Deposit Insurance Fund and arebacked by the full faith and credit of the U.S. Government. As insurer, theFederal Deposit Insurance Corporation is authorized to conduct examinations of,and to require reporting by, insured institutions. It also may prohibit anyinsured institution from engaging in any activity determined by regulation ororder to pose a serious threat to the Federal Deposit Insurance Corporation.The Federal Deposit Insurance Corporation also has the authority to initiateenforcement actions against savings institutions.

 

In February 2009,the FDIC adopted a final regulation that provided for the replenishment of theDeposit Insurance Fund over a period of seven years. The restoration planchanged the FDIC’s base assessment rates and the risk-based assessment system.The a risk-based premium system provides for quarterly assessments based on aninsured institution’s ranking in one of four risk categories based uponsupervisory and capital evaluations. Theassessment rate for an individual institution isdetermined according to a formula based on a weighted average of theinstitution’s individual CAMELS component ratings plus either six financialratios or, in the case of an institution with assets of $10.0 billion or more,the average ratings of its long-term debt. Alliance Bank qualifies as a wellcapitalized Bank.  Well-capitalizedinstitutions (generally those with CAMELS composite ratings of 1 or 2) are groupedin Risk Category I and their initial base assessment rate for deposit insuranceis set at an annual rate of between 12 and 16 basis points. The initial baseassessment rate for institutions in Risk Categories II, III and IV is setat annual rates of 22, 32 and 50 basis points, respectively. These initial baseassessment rates are adjusted to determine an institution’s final assessmentrate based on its brokered deposits, secured liabilities and unsecured debt.The adjustments include higher premiums for institutions that relysignificantly on excessive amounts of brokered deposits, including CDARS,higher premiums for excessive use of secured liabilities, including FederalHome Loan Bank advances and adding financial ratios and debt issuer ratings tothe premium calculations for banks with over $10.0 billion in assets, whileproviding a reduction for all institutions for their unsecured debt.

 

In addition, allinstitutions with deposits insured by the FDIC are required to pay assessmentsto fund interest payments on bonds issued by the Financing Corporation, amixed-ownership government corporation established to recapitalize thepredecessor to the Deposit Insurance Fund. The assessment rate for the fourthquarter of 2009 was .00255% of insured deposits and is adjusted quarterly.These assessments will continue until the Financing Corporation bonds mature in2019.

 

On May 22, 2009, theFDIC announced a five basis point special assessment on each insured depositoryinstitution’s assets minus its Tier 1 capital as of June 30, 2009. Theamount of our special assessment, which was paid on September 30, 2009,was $195,000.

 

On November 12,2009, the FDIC adopted regulations that required insured depositoryinstitutions to prepay on December 30, 2009, their estimated quarterlyrisk-based assessments for the fourth quarter of 2009 and all of 2010, 2011 and2012, along with their quarterly risk-based assessment for the third quarter of2009. The prepaid assessment was collected instead of imposing additional specialassessments at this time.

 

The FDIC may terminatethe deposit insurance of any insured depository institution, including theBank, if it determines after a hearing that the institution has engaged or isengaging in unsafe or unsound practices, is in an unsafe or unsound conditionto continue operations, or has violated any applicable law, regulation, orderor any condition imposed by an agreement with the FDIC. It also may suspenddeposit insurance temporarily during the hearing process for the permanent terminationof insurance, if the institution has no tangible capital. If insurance ofaccounts is terminated, the accounts at the institution at the time of thetermination, less subsequent withdrawals, shall continue to be insured for aperiod of six months to two years, as determined by the FDIC. Management is notaware of any existing circumstances which could result in termination of theBank’s deposit insurance.

 

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

 

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

 

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

 

Alliance Bank is alsosubject to more stringent Pennsylvania Department of Banking capitalguidelines.  Although not adopted inregulation form, the Department utilizes capital standards requiring a minimumof 6% leverage capital and 10% risk-based capital.  The components of leverage and risk-basedcapital are substantially the same as those defined by the FDIC.

 

At December 31,2009, Alliance Bank’s capital ratios exceeded each of its capital requirements.

 

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

 

·                                          acquiring or retaining a majorityinterest in a subsidiary;

 

·                                          investing as a limited partner in apartnership the sole purpose of which is direct or indirect investment in theacquisition, rehabilitation or new construction of a qualified housing project,provided that such limited partnership investments may not exceed 2% of thebank’s total assets;

 

·                                          acquiring up to 10% of the voting stockof a company that solely provides or reinsures directors’, trustees’ andofficers’ liability insurance coverage or bankers’ blanket bond group insurancecoverage for insured depository institutions; and

 

·                                          acquiring or retaining the voting sharesof a depository institution if certain requirements are met.

 

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

 

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not represent asignificant risk to the deposit insurance funds.  Investments permitted under that authorityinclude real estate activities and securities activities.

 

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

 

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

 

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

 

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

 

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

 

If an application is notrequired to be filed, savings institutions such as Alliance Bank which are asubsidiary of a holding company (as well as certain other institutions) muststill file a notice with the Office of Thrift Supervision at least 30 daysbefore the board of directors declares a dividend or approves a capitaldistribution.

 

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

 

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

 

**Privacy Requirements of theGramm-Leach-Bliley Act.**  Federal law places limitationson financial institution like Alliance Bank regarding the sharing of consumerfinancial information with unaffiliated third parties.  Specifically, these provisions requires allfinancial institutions offering financial products or services to retailcustomers to provide such customers with the financial institution’s privacypolicy and provide such customers the opportunity to “opt out” of the sharingof 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-Money Laundering.** Federal anti-money laundering rules impose various requirements onfinancial institutions intends to prevent the use of the U.S. financial systemto fund terrorist activities.  Theseprovision include a requirement that financial institutions operating in theUnited States have anti-money laundering compliance programs, due diligencepolicies and controls to ensure the detection and reporting of moneylaundering. Such compliance programs supplement existing compliancerequirements, also applicable to financial institutions, under the Bank SecrecyAct and the Office of Foreign Assets Control Regulations.  Alliance Bank has established policies andprocedures to ensure compliance with the federal anti-laundering provisions.

 

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

 

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

 

**General.**  Alliance Bancorpand Alliance Mutual Holding Company are subject to regulation as savings andloan holding companies under the Home Owners’ Loan Act, as amended, instead ofbeing subject to regulation as bank holding companies under the Bank HoldingCompany Act of 1956 because Alliance Bank has made an election under Section 10(l) ofthe Home Owners’ Loan Act to be treated as a “savings association” for purposesof Section 10 of the Home Owners’ Loan Act.  As a result, Alliance Bancorp and AllianceMutual Holding Company registered with the Office of Thrift Supervision and aresubject to Office of Thrift Supervision regulations, examinations, supervisionand reporting requirements relating to savings and loan holding companies.  As a subsidiary of a savings and loan holdingcompany, Alliance Bank is subject to certain restrictions in its dealings withAlliance Bancorp and Alliance Mutual Holding Company and affiliates thereof.

 

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

 

·                                          investing in the stock of a savingsinstitution;

 

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

 

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

 

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

 

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

 

Generally,companies that become savings and loan holding companies following the May 4,1999 grandfather date in the Gramm-Leach-Bliley Act of 1999 may engage only inthe activities permitted for financial institution holding companies or formultiple savings and loan holding companies.

 

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

 

If a mutual holdingcompany or a mutual holding company subsidiary holding company acquires ormerges 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.

 

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

 

**QualifiedThrift Lender Test.**  A savings association can comply with theQualified Thrift Lender test by either meeting the Qualified Thrift Lender testset forth in the Home Owners’ Loan Act and implementing regulations orqualifying as a domestic building and loan association as defined in Section 7701(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:

 

·                                          the institution may not engage in any newactivity or make any new investment, directly or indirectly, unless suchactivity or investment is permissible for a national bank;

 

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·                                          the branching powers of the institutionshall be restricted to those of a national bank; and

 

·                                          payment of dividends by the institutionshall be subject to the rules regarding payment of dividends by a nationalbank.

 

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

 

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

 

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

 

In addition, Sections22(g) and (h) of the Federal Reserve Act place restrictions on loansto executive officers, directors and principal stockholders.  Under Section 22(h), loans to adirector, an executive officer and to a greater than 10% stockholder of asavings institution, and certain affiliated interests of either, may notexceed, together with all other outstanding loans to such person and affiliatedinterests, the savings institution’s loans to one borrower limit (generallyequal to 15% of the institution’s unimpaired capital and surplus).  Section 22(h) also requires thatloans to directors, executive officers and principal stockholders be made onterms substantially the same as offered in comparable transactions to otherpersons unless the loans are made pursuant to a benefit or compensation programthat (i) is widely available to employees of the institution and (ii) doesnot give preference to any director, executive officer or principalstockholder, or certain affiliated interests of either, over other employees ofthe savings institution.  Section 22(h) alsorequires prior board approval for certain loans.  In addition, the aggregate amount of extensionsof credit by a savings institution to all insiders cannot exceed theinstitution’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions onloans to executive officers.  At December 31,2009, Alliance Bank was in compliance with the above restrictions.

 

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

 

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

 

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

 

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

 

**Federal Home Loan Bank System**. Alliance Bank is a member of the Federal Home Loan Bank of Pittsburgh,which is one of 12 regional Federal Home Loan Banks.  Each Federal Home Loan Bank serves as areserve or central bank for its members within its assigned region.  It is funded primarily from funds depositedby member institutions and proceeds from the sale of consolidated obligationsof the Federal Home Loan Bank System.  Itmakes loans to members (i.e., advances) in accordance with policies andprocedures established by the board of directors of the Federal Home Loan Bank.

 

As a member, AllianceBank is required to purchase and maintain stock in the Federal Home Loan Bankof Pittsburgh in an amount equal to the greater of 1% of its aggregate unpaidresidential mortgage loans, home purchase contracts or similar obligations atthe beginning of each year or 5% of its outstanding advances from the FederalHome Loan Bank.  At December 31,2009, Alliance Bank was in compliance with this requirement.

 

**Federal Reserve Board System.** The Federal Reserve Board requires all depository institutions tomaintain non-interest bearing reserves at specified levels against theirtransaction accounts, which are primarily checking and NOW accounts, and non-personaltime deposits.  The balances maintainedto meet the reserve requirements imposed by the Federal Reserve Board may beused to satisfy the liquidity requirements that are imposed by the PennsylvaniaDepartment of Banking.  At December 31,2009, Alliance Bank was in compliance with these reserve requirements.

 

**FEDERAL AND STATE TAXATION**

 

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

 

**Methodof Accounting.**  For federal income tax purposes, income andexpenses are reported on the accrual method of accounting and Alliance Bancorpfiles its federal income tax return using a December 31 calendar year end.

 

**Bad DebtReserves.**  The Small Business Job Protection Act of 1996eliminated the use of the reserve method of accounting for bad debt reserves bysavings institutions, effective for taxable years beginning after 1995.  Prior to that time, Alliance Bank waspermitted to establish a reserve for bad debts and to make additions to thereserve.  These additions could, withinspecified formula limits, be deducted in arriving at taxable income.  As a result of the Small Business JobProtection Act, savings associations must use the specific chargeoff method incomputing their bad debt deduction beginning with their 1996 federal taxreturn.

 

**TaxableDistributions and Recapture.**  Prior to theSmall Business Job Protection Act, bad debt reserves created prior to January 1,1988 were subject to recapture into taxable income if Alliance Bank failed tomeet certain thrift asset and 

 

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definitional tests.  New federal legislation eliminated thesethrift related recapture rules.  However,under current law, pre-1988 reserves remain subject to recapture should AllianceBank make certain non-dividend distributions or cease to maintain a savingsbank charter.

 

At December 31,2009, Alliance Bank’s total federal pre-1988 reserve was approximately $7.1million.  The reserve reflects thecumulative effects of federal tax deductions for which no federal income taxprovisions have been made.

 

**MinimumTax.**  The Internal Revenue Code imposes analternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxableincome plus certain tax preferences (“alternative minimum taxable income” or “AMTI”).  The AMT is payable to the extent such AMTI isin excess of an exemption amount.  Netoperating losses can offset no more than 90% of AMTI.  Certain payments of alternative minimum taxmay be used as credits against regular tax liabilities in future years.  Alliance Bank has been subject to the AMT andas of December 31, 2009, had $1.3 million of AMT available as credit forcarryover purposes.

 

**NetOperating Loss Carryovers.**  Net operatinglosses incurred in taxable years beginning before August 6, 1997 may becarried back to the three preceding taxable years and forward to the succeeding15 taxable years.  For net operatinglosses in years beginning after August 5, 1997, other than 2001 and 2002,such net operating losses can be carried back to the two preceding taxable yearsand forward to the succeeding 20 taxable years. Net operating losses arising in 2001 or 2002 may be carried back fiveyears and may be carried forward 20 years. At December 31, 2009, Alliance Bank had no net operating losscarryforwards respectively, for federal income tax purposes.

 

**CorporateDividends-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 is 80% in the case ofdividends received from corporations, which a corporate recipient owns lessthan 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.

 

**PennsylvaniaTaxation.**  Alliance Bancorp is subject to thePennsylvania Corporate Net Income Tax and Capital Stock and Franchise Tax.  The Corporation Net Income Tax rate forfiscal 2009, 2008, and 2007 is 9.99% and is imposed on unconsolidated taxableincome for federal purposes with certain adjustments.  In general, the Capital Stock Tax is aproperty tax imposed at the rate of approximately 0.289% (for 2009) 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 subjectto tax under the Pennsylvania Mutual Thrift Institutions Tax Act (the “MTIT”),as amended to include thrift institutions having capital stock.  Pursuant to the MTIT, the tax rate is11.5%.  The MTIT exempts Alliance Bankfrom other taxes imposed by the Commonwealth of Pennsylvania for state incometax purposes and from all local taxation imposed by political subdivisions,except taxes on real estate and real estate transfers.  The MTIT is a tax upon net earnings,determined in accordance with U.S. generally accepted accounting principleswith certain adjustments.  The MTIT, incomputing income under U.S. generally accepted accounting principles, allowsfor the deduction of interest earned on state and federal obligations, whiledisallowing a percentage of a thrift’s interest expense deduction in theproportion of interest income on those securities to the overall interestincome of Alliance Bank.  Net operating losses,if any, thereafter can be carried forward three years for MTIT purposes.  At December 31, 2009, the Bank hadapproximately $790,000, $1.4 million, and $772,000 in NOL carryforwardsexpiring in 2010, 2011 and 2012, respectively, for state tax purposes.

 

**Item1A.  Risk Factors**

 

Not applicable

 

**Item1B.  Unresolved Staff Comments**

 

None

 

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

 

**Officesand Properties**

 

At December 31,2009, the Company conducted its business from its executive offices inBroomall, Pennsylvania and eight full service offices, all of which are locatedin southeastern Pennsylvania.

 

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The followingtable sets forth certain information with respect to the office and otherproperties of the Company at December 31, 2009.

 
| **Description/Address**           | ** ** | **Leased/Owned** | ** ** | **Net Book  Value of  Premises and  Fixed Assets** | ** ** | **Amount of  Deposits** | ** ** |
|-----------------------------------|------------|------------------|------------|----------------------------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | ** **       | ** ** | **(In Thousands)**                            | ** ** |
|                              |       |             |       |                                               |       |                    |       |
| MAIN OFFICE                       |       |             |       |                                               |       |                    |       |
|                              |       |             |       |                                               |       |                    |       |
| Lawrence Park                     |       | Owned            |       | $                                                  | 1,411      |                    | $          | 88,013 |   |
| 541 Lawrence Road                 | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| Broomall, PA 19008                | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| ** **                        | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| BRANCH OFFICES                    | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| ** **                        | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| Upper Darby                       |       | Leased (1)       |       | 95                                                 |       | 41,391                  |       |
| 69th and Walnut Sts               | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| Upper Darby, PA 19082             | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| ** **                        | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| Secane                            |       | Leased (2)       |       | 123                                                |       | 63,805                  |       |
| 925 Providence Road               | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| Secane, PA 19018                  | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| ** **                        | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| Newtown Square                    |       | Leased (3)       |       | 21                                                 |       | 32,204                  |       |
| 252 & West  Chester Pike | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| Newtown Square, PA  19073         | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| ** **                        | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| Havertown                         |       | Leased (4)       |       | 94                                                 |       | 54,260                  |       |
| 500 E. Township Line  Road        | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| Havertown, PA 19083               | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| ** **                        | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| Lansdowne                         |       | Owned            |       | 211                                                |       | 24,212                  |       |
| 9 E. Baltimore Pike               | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| Lansdowne, PA 19050               | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| ** **                        | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| Springfield                       |       | Leased (5)       |       | 416                                                |       | 39,969                  |       |
| 153 Saxer Avenue                  | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| Springfield, PA 19064             | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| ** **                        | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| Shoppes at Brinton Lake           |       | Leased (6)       |       | 126                                                |       | 23,685                  |       |
| 979 Baltimore Pike                | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| Glen Mills, PA 19342              | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| ** **                        | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| Paoli Shopping Center             |       | Leased (7)       |       | 33                                                 |       | 10,784                  |       |
| 82 E. Lancaster Ave.              | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
| Paoli, PA 19301                   | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **              | ** ** |
|                                   |            |                  |            |                                                    |            |                         |            |  |  |

 

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(1) The leaseexpires in February 2017 with two successive options to extend the leasefor five years each.

 

(2) The leaseexpires in April 2011.

 

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

 

(4) The leaseexpires in January 2011 with two successive options to extend the leasefor five years each.

 

(5) The leaseexpires in September 2015.

 

(6) The leaseexpires in January 2021 with two successive options to extend the leasefor five years each.

 

(7) The leaseexpires May 2012.

 

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**Item3.  Legal Proceedings.**

 

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

 

**Item4. **.

 

[Reserved]

 

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**PART II.**

 

**ITEM 5.  MARKET FOR COMMON EQUITY, AND RELATEDSTOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES.**

 
| **Corporate  Information**                         |                                               |
|----------------------------------------------------|----------------------------------------------------|
|                                               |                                               |
| **Independent  Registered Public Accounting Firm** | **Investor  Information**                          |
| ParenteBeard LLC                                   | Investors, analysts and  others seeking            |
| 1200 Atwater Drive,  Suite 225                | information may  contact:                          |
| Malvern, PA 19355                                  | Kathleen P. Lynch                                  |
|                                               | Corporate Secretary                                |
| **Market  Makers**                                 | 541 Lawrence Road                                  |
| FTN Midwest Securities  Corp                       | Broomall, PA 19008-3599                            |
| Sandler O’  Neill & Partners, LP     | (610) 353-2900                                     |
| USB Financial  Services, Inc.                 |                                               |
| Stifel,  Nicholas, & Company, Inc.   | **Transfer  Agent**                                |
|                                               | Direct questions  regarding dividend checks,       |
| **Securities  Counsel**                            | address and name  changes or lost certificates to: |
| Elias, Matz, Tiernan & Herrick LLP        | Registrar and Transfer  Company                    |
| 734 15th Street, NW, 11th Floor               | 10 Commerce Drive                                  |
| Washington, D.C. 20005                             | Cranford, NJ 07016                                 |

 

**MarketInformation**

 

Alliance BancorpCommon Stock is traded on the Nasdaq Global Market and quoted under the symbol “ALLB”.  The closing price on December 31, 2009was $8.40 per share.  There were6,729,676 shares outstanding as of December 31, 2009, comprised of3,973,750 shares held by Alliance Mutual Holding Company and 2,755,926 sharesheld by approximately 1,100 minority public stockholders.

 
| **For the Quarter Ended**   | ** ** | **High** | ** ** | **Low**    | ** ** | **Close** | ** ** | **Cash Dividends Declared** | ** ** |
|-----------------------------|------------|----------|------------|------------|------------|-----------|------------|-----------------------------|------------|
|                        |       |     |       |       |       |      |       |                        |       |
| **December 31, 2009**  | ** ** | **$**    | **8.75**   | ** ** | **$**      | **8.40**  | ** ** | **$**                       | **8.40**   | ** ** | **$** | **.03** | ** ** |
| **September 30, 2009** | ** ** | **8.89** | ** ** | **8.50**   | ** ** | **8.50**  | ** ** | **.03**                     | ** ** |
| **June 30, 2009**      | ** ** | **8.65** | ** ** | **7.50**   | ** ** | **8.53**  | ** ** | **.03**                     | ** ** |
| **March 31, 2009**     | ** ** | **8.05** | ** ** | **7.25**   | ** ** | **7.93**  | ** ** | **.03**                     | ** ** |
|                        |       |     |       |       |       |      |       |                        |       |
| December 31, 2008      |       | $        | 8.44       |       | $          | 7.25      |       | $                           | 7.50       |   | $ | .06 |   |
| September 30, 2008     |       | 8.83     |       | 7.24       |       | 8.44      |       | .06                         |       |
| June 30, 2008          |       | 9.48     |       | 8.81       |       | 8.86      |       | .06                         |       |
| March 31, 2008         |       | 9.06     |       | 6.82       |       | 8.81      |       | .06                         |       |

 

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**Marketfor Common Equity, and Related Stockholder Matters and Purchases of EquitySecurities**

 

The following table setsforth information with respect to purchases made by or on behalf of the Companyof shares of common stock of the Company during the indicated periods.

 
| ** **         | ** ** | ** **            | ** ** | ** **                   | ** ** | ** **                             | ** ** | **Maximum**                        | ** ** |
|--------------------|------------|-----------------------|------------|------------------------------|------------|----------------------------------------|------------|------------------------------------|------------|
| ** **         | ** ** | ** **            | ** ** | ** **                   | ** ** | **Total Number of**          | ** ** | **Number of Shares**     | ** ** |
| ** **         | ** ** | ** **            | ** ** | ** **                   | ** ** | **Shares Purchased**              | ** ** | **that May Yet Be** | ** ** |
| ** **         | ** ** | **Total Number** | ** ** | ** **                   | ** ** | **as Part of Publicly** | ** ** | **Purchased Under**           | ** ** |
| ** **         | ** ** | **of Shares**    | ** ** | **Average Price**       | ** ** | **Announced Plans**               | ** ** | **the Plans or**         | ** ** |
| **Period**         | ** ** | **Purchased(1)**      | ** ** | **Paid per Share** | ** ** | **or Programs**                   | ** ** | **Programs(1)**                    | ** ** |
|               |       |                  |       |                         |       |                                   |       |                               |       |
| October 2009  |       | —                |       | —                       |       | —                                 |       | 116,612                            |       |
| November 2009 |       | 2,000                 |       | $                            | 8.53       |                                   | 2,000      |                               | 114,612    |   |
| December 2009 |       | 50,000                |       | $                            | 8.63       |                                   | 50,000     |                               | 64,612     |   |
|               |       |                  |       |                         |       |                                   |       |                               |       |
| Totals             |       | 52,000                |       | $                            | 8.63       |                                   | 52,000     |                               | 64,612     |   |

 

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(1)    Allshares were repurchased under the Company’s announced repurchase program. On January 29,2009, the Company announced a program to repurchase up to 292,612 shares, or10% of the outstanding common stock other than shares owned by Alliance MutualHolding Company.  The program will expirein twelve months, or on January 29, 2010, and all shares are to bepurchased in the open market or in privately negotiated transactions, as in theopinion of management, market conditions warrant.  Subsequently, the Company announced theextension of the repurchase program that expired January 29, 2010 for anadditional twelve months.

 

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**Item 6.  Selected Financial Data****.**

 

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

##### *** ***

The selected consolidatedfinancial and other data of Alliance Bancorp, Inc. of Pennsylvania setforth below does not purport to be complete and should be read in conjunctionwith, and is qualified in its entirety by, the more detailed information,including the Consolidated Financial Statements and related Notes, appearingelsewhere in this Annual Report.

 
| ** **                                           | ** ** | **As of or For the Year Ended December 31,**     | ** **  |
|------------------------------------------------------|------------|-------------------------------------------------------|-------------|
| ** **                                           | ** ** | **2009**                                              | ** **  | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(Dollars  in thousands, except per share amounts)** | ** **  |
|                                                 |       |                                                  |        |   |   |   |   |   |   |   |   |
| **Selected Financial Data**                          |       |                                                  |        |   |   |   |   |   |   |   |   |
| Total  assets                                        | ** ** | **$**                                                 | **464,216** |   | $ | 424,410 |   | $ | 424,467 |   | $ | 410,350 |   | $ | 389,035 |   |
| Cash  and cash equivalents                           | ** ** | **74,936**                                            |        | 28,308 |   | 42,079 |   | 48,283 |   | 20,956 |   |
| Loans  receivable, net                               | ** ** | **285,008**                                           |        | 278,437 |   | 256,932 |   | 235,761 |   | 224,294 |   |
| Loans  held for sale                                 | ** ** | **—**                                            |        | — |   | — |   | 125 |   | — |   |
| Mortgage-backed  securities                          | ** ** | **23,355**                                            |        | 31,921 |   | 35,632 |   | 43,636 |   | 48,362 |   |
| Investment  securities                               | ** ** | **52,336**                                            |        | 62,070 |   | 67,861 |   | 59,305 |   | 72,079 |   |
| Other  real estate owned                             | ** ** | **2,968**                                             |        | — |   | — |   | — |   | 1,795 |   |
| Deposits                                             | ** ** | **378,323**                                           |        | 331,701 |   | 330,788 |   | 333,802 |   | 297,710 |   |
| Borrowings  (1)                                      | ** ** | **32,021**                                            |        | 37,198 |   | 37,042 |   | 37,172 |   | 52,501 |   |
| Stockholders’  equity                           | ** ** | **48,445**                                            |        | 48,899 |   | 51,458 |   | 33,500 |   | 34,127 |   |
| Non-performing  assets (2)                           | ** ** | **10,805**                                            |        | 6,996 |   | 2,097 |   | 1,559 |   | 3,735 |   |
|                                                 |       |                                                  |        |   |   |   |   |   |   |   |   |
| **Selected Operating Data**                          |       |                                                  |        |   |   |   |   |   |   |   |   |
| Interest  and dividend income                        | ** ** | **$**                                                 | **21,091**  |   | $ | 22,543 |   | $ | 24,340 |   | $ | 21,752 |   | $ | 19,883 |   |
| Interest  expense                                    | ** ** | **9,509**                                             |        | 11,702 |   | 13,999 |   | 11,331 |   | 8,907 |   |
| Net  interest income                                 | ** ** | **11,582**                                            |        | 10,841 |   | 10,341 |   | 10,421 |   | 10,976 |   |
| Provision  for loan losses                           | ** ** | **528**                                               |        | 585 |   | 120 |   | 60 |   | 120 |   |
| Net interest  income after provision for loan losses |       | **11,054**                                            |        | 10,256 |   | 10,221 |   | 10,361 |   | 10,856 |   |
| Other  income                                        | ** ** | **1,164**                                             |        | 241 |   | 484 |   | 1,452 |   | 1,133 |   |
| Other  expenses                                      | ** ** | **10,900**                                            |        | 10,303 |   | 9,807 |   | 10,509 |   | 10,972 |   |
| Income  before income tax benefit                    | ** ** | **1,318**                                             |        | 194 |   | 898 |   | 1,304 |   | 1,017 |   |
| Income  tax benefit                                  | ** ** | **(41**                                               | **)**       | (411 | ) | (157 | ) | (67 | ) | (157 | ) |
| Net  income                                          | ** ** | **$**                                                 | **1,359**   |   | $ | 605 |   | $ | 1,055 |   | $ | 1,371 |   | $ | 1,174 |   |
|                                                 |       |                                                  |        |   |   |   |   |   |   |   |   |
| Basic  earnings per share (3)                        | ** ** | **$**                                                 | **0.20**    |   | $ | 0.09 |   | $ | 0.15 |   | $ | 0.19 |   | $ | 0.16 |   |

 

(Footnotes on Following Page)

 

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Selected Consolidated Financial and Other Data (continued)

* *
| ** **                                                                                        | ** ** | **As of or For the Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2009**                                          | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Selected Operating Ratios**                                                                     |       |                                              |       |   |   |   |   |   |   |   |   |
| Average  yield earned on interest-earning assets                                                  | ** ** | **5.08**                                          | **%**      | 5.64 | % | 6.12 | % | 5.89 | % | 5.43 | % |
| Average  rate paid on interest-bearing liabilities                                                | ** ** | **2.57**                                          |       | 3.32 |   | 4.03 |   | 3.39 |   | 2.69 |   |
| Average  interest rate spread (4)                                                                 | ** ** | **2.51**                                          |       | 2.32 |   | 2.09 |   | 2.50 |   | 2.74 |   |
| Net  interest margin (4)                                                                          | ** ** | **2.79**                                          |       | 2.72 |   | 2.60 |   | 2.82 |   | 3.00 |   |
| Ratio  of interest-earning assets to interest-bearing liabilities                                 | ** ** | **115.08**                                        |       | 113.54 |   | 114.54 |   | 110.66 |   | 110.74 |   |
| Noninterest  expense as a percent of average assets                                               | ** ** | **2.47**                                          |       | 2.44 |   | 2.33 |   | 2.69 |   | 2.89 |   |
| Return  on average assets                                                                         | ** ** | **0.30**                                          |       | 0.14 |   | 0.25 |   | 0.35 |   | 0.30 |   |
| Return  on average equity                                                                         | ** ** | **2.97**                                          |       | 1.21 |   | 2.18 |   | 4.05 |   | 3.39 |   |
| Dividend  payout ratio                                                                            | ** ** | **25.59**                                         |       | 122.91 |   | 58.56 |   | 90.39 |   | 105.54 |   |
| Efficiency  ratio (5)                                                                             | ** ** | **85.52**                                         |       | 92.97 |   | 90.60 |   | 88.51 |   | 90.61 |   |
| Ratio  of average equity to average assets                                                        | ** ** | **10.08**                                         |       | 11.79 |   | 11.52 |   | 8.68 |   | 8.94 |   |
| Full-service  offices at end of period                                                            | ** ** | **9**                                             |       | 9 |   | 9 |   | 9 |   | 8 |   |
|                                                                                              | ** ** | ** **                                        |       |   |   |   |   |   |   |   |   |
| **Asset Quality Ratios**                                                                          | ** ** | ** **                                        |       |   |   |   |   |   |   |   |   |
| Nonperforming  loans and troubled debt restructurings as a percent of total loans receivable  (2) | ** ** | **2.71**                                          | **%**      | 2.48 | % | 0.81 | % | 0.65 | % | 0.85 | % |
| Nonperforming  assets as a percent of total assets (2)                                            | ** ** | **2.33**                                          |       | 1.65 |   | 0.49 |   | 0.38 |   | 0.96 |   |
| Allowance  for loan losses as a percent of total loans receivable                                 | ** ** | **1.23**                                          |       | 1.13 |   | 1.09 |   | 1.14 |   | 1.18 |   |
| Allowance  for loan losses as a percent of nonperforming loans and troubled debt  restructurings  | ** ** | **45.14**                                         |       | 45.30 |   | 135.00 |   | 174.39 |   | 137.63 |   |
| Net  charge-offs to average loans receivable outstanding during the period                        | ** ** | **0.06**                                          |       | 0.09 |   | 0.00 |   | 0.02 |   | 0.03 |   |
|                                                                                              | ** ** | ** **                                        |       |   |   |   |   |   |   |   |   |
| **Bank Capital Ratios**                                                                           | ** ** | ** **                                        |       |   |   |   |   |   |   |   |   |
| Tier  1 risk-based capital ratio                                                                  | ** ** | **15.97**                                         | **%**      | 16.33 | % | 16.35 | % | 14.05 | % | 14.92 | % |
| Total  risk-based capital ratio                                                                   | ** ** | **17.17**                                         |       | 17.47 |   | 17.38 |   | 15.12 |   | 16.06 |   |
| Tier  1 leverage capital ratio                                                                    | ** ** | **10.17**                                         |       | 10.67 |   | 10.52 |   | 8.98 |   | 9.02 |   |

* *

----

| (1)    | Borrowings consist of  Federal Home Loan Bank (“FHLB”) advances, demand notes issued to the U.S.  Treasury and, the Employee Stock Ownership Plan (“ESOP”) debt prior to  conversion.                                                                                                          |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                               |
| (2)    | Nonperforming assets  consist of nonperforming loans, troubled debt restructurings and other real  estate owned (“OREO”). Nonperforming loans consist of nonaccrual loans and  accruing loans 90 days or more overdue, while OREO consists of real estate  acquired through, or in lieu of, foreclosure. |
|   |                                                                                                                                                                                                                                                                                                               |
| (3)    | The calculation of earnings  per share for 2005 and 2006 has been adjusted for the exchange and additional  share issuance in the reorganization and offering completed on January 30,  2007                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                               |
| (4)    | Interest rate spread  represents the difference between the weighted average yield on  interest-earning assets and the weighted average cost of interest-bearing  liabilities, and net interest margin represents net interest income as a percentage  of average interest-earning assets.                         |
|   |                                                                                                                                                                                                                                                                                                               |
| (5)    | The efficiency ratio is  calculated by dividing other expenses by the sum of net interest income and  other income.                                                                                                                                                                                                |

 

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

 

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

 

**Overview**

 

Alliance Bancorp, Inc.of Pennsylvania is a bank holding company which own 100% of the capital stockof Alliance Bank (“Bank”) which is a community oriented savings bankheadquartered in Broomall, Pennsylvania. We operate a total of nine banking offices located in Delaware andChester Counties, which are suburbs of Philadelphia.  Our primary business consists of attractingdeposits from the general public and using those funds, together with funds weborrow, to originate loans to our customers and invest in securities such asU.S. Government and agency securities, mortgage-backed securities and municipalobligations.  At December 31, 2009,we had $464.2 million of total assets, $378.3 million of total deposits andstockholders’ equity of $48.4 million.

 

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

 

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

 

Certain highlights of ouroperating strategy are:

 

*Expanding our Market Presence*. We have taken steps to increase our market penetration in our existingmarket areas by increasing the products and services we offer, incentivizingour employees to cross-sell our products and emphasizing customer service in aneffort to capture more of each customer’s banking relationships.  In addition to organic growth, we continue toevaluate market expansion opportunities. Though net proceeds from the offering has facilitated our ability toconsider additional new offices, either on a de novo basis or throughacquisitions, we currently have no plans, agreements or understandings withrespect to any acquisitions.

 

*Emphasizing Business BankingOperations. *We have hired an additional loan officerin 2009 and have increased our calls on local builders and other localbusinesses in an effort to increase our business banking relationships.  As a locally based bank, we believe that weoffer a high level of customer service and a quick loan application andapproval process which is attractive to many local, small to medium sizedbusinesses.

 

*Emphasizing Commercial RealEstate Loans. *At December 31, 2009, $131.9 millionor 45.7% of our total loan portfolio consisted of commercial real estateloans.  Commercial real estate loans areattractive because they generally provide us with higher average yields thansingle-family residential mortgage loans and they typically have adjustablerates of interest and/or shorter terms to maturity than traditionalsingle-family residential mortgage loans.  The net proceeds from the offering increasedour capital and will facilitate our ability to expand higher quality loanrelationships, subject to our current underwriting guidelines.  We intend to continue to emphasize growth inour commercial real estate lending in a manner consistent with our loanunderwriting policies and procedures.

 

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

 

*Continuing Residential MortgageLending. *Historically, we were a traditional single-familyresidential mortgage lender, and we will continue to offer traditional single-familyresidential loan products.  In recentperiods, we have emphasized home equity loans and lines of credit due to theshorter terms to maturity and adjustable interest rates which we generallyoffer on such products as well as consumer demand for home equity loans andlines of credit.  At December 31,2009, home equity loans and lines of credit amounted to $21.4 million or 7.4%of the total loan portfolio.

 

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*IncreasingCore Deposits. *We intend to increase our core depositsin order to help reduce and control our cost of funds.  The Bank offers a wide variety of deposits toits customers and is competitive in the rates it offers although it does notnecessarily seek to match the highest rates paid by competitors.  The Bank also promotes longer term depositswhere possible and consistent with its asset liability management goals.  In addition to increasing its core deposits,the Bank continually reviews its borrowings as a source of funds and maydetermine to prepay additional borrowings, even if there would be a prepaymentpenalty, where in the judgment of management any penalty would be offset in areasonable period through an improved net interest spread.  Management has determined not to repay orrefinance such advances at this time because the current prepayment penaltiesupon early retirement would not be offset in a reasonable period of timethrough an improved net interest spread and because all advances mature in2010.

 

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

 

Our net income amountedto $1.4 million and $605,000 for the years ended December 31, 2009 and2008, respectively.  Some of the majorfactors and trends which have impacted our results in these periods include thefollowing:

 

*Other than Temporary Impairment of Securities.*  Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether or not the Bank intends to sell or expects that it is more likely than not that it will be required to sell the security prior to an anticipated recovery in fair value.  Once a decline in value for a debt security is determined to be other-than-temporary, the other-than-temporary impairment is separated into (a) the amount of total other-than-temporary impairment related to a decrease in cash flows expected to be collected from debt security (the credit loss) and (b) the amount of other-than-temporary impairment related to all other factors.  The amount of the total other-than-temporary impairment related to credit loss is recognized in earnings.  The amount of other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss).

 

During 2008, the Companyrecognized $882,000 in impairment charges on certain mutual funds.  The Company attributes the lower valuationsof these mutual funds to a significant widening of spreads primarily due to themortgage-related securities underlying these funds.  This spread differential is primarily due tothe general lack of investor interest for these type of securities in thecurrent market environment.  On August 20,2008, subsequent to recording impairment charges, the Company sold these mutualfunds to Alliance Mutual Holding Company at fair value.

 

*Compression of Our Net InterestSpread and Net Interest Margin.*  Our averageinterest rate spread was 2.51% and 2.32% for the years ended December 31,2009 and 2008, respectively.  AllianceBank’s net interest margin, which is net interest income as a percentage ofaverage interest-earning assets, was 2.79% and 2.71% for the years ended December 31,2009 and 2008, respectively.  The FederalReserve Board made no changes to interest rates in 2009.  During 2008, the Federal Reserve Boardreduced the federal funds rate seven times from 4.25% at December 31, 2007to a range of 0% to 0.25% at December 31, 2008, with no changes in2009.  Generally, a decreasing interestrate environment will reduce interest income earned on interest-earning assetsand cause downward pressure on rates paid for interest bearing deposits.  However, interest rate changes generallyaffect interest income on prime based loans and overnight deposits almostimmediately, while the impact on interest expense on customer deposits is moregradual due to fixed term certificates of deposit and the highly competitiveenvironment in which the Company operates. The Company anticipates that the current low rate environment willcontinue to put downward pressure on short term interest rates until theeconomic recovery is sustainable.  However, when the interest rate environment begins to increase this maycause pricing pressure on the Bank’s deposit accounts as it attracts newcustomers and retains existing customers.

 

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*Managing Non-Interest Expenses.* Our non-interest expenses amounted to$10.9 million and $10.3 million for the years ended December 31, 2009 and2008, respectively.  The increase wasprimarily due to a $563,000 or 290.9% increase in FDIC premiums expense and anincrease in salary and employee benefits of $214,000 or 3.7% offset by a$158,000 or 34.0% decrease in advertising and marketing expenses. The increasein FDIC deposit insurance premiums included a $195,000 charge for the FDICspecial assessment the Company paid in September of 2009.  The increase in salaries and employeebenefits was attributed to a higher level of staff members and annual increasesin employees’ salaries.

 

**CriticalAccounting Policies**

 

In reviewing and understanding financial information forthe Company, you are encouraged to read and understand the significantaccounting policies used in preparing our consolidated financial statementsincluded elsewhere herein.  Thesepolicies are described in Note 2 of the notes to our consolidated financialstatements.  The accounting and financialreporting policies of the Company conform to accounting principles generallyaccepted in the United States of America and to general practices within thebanking industry.  Accordingly, theconsolidated financial statements require certain estimates, judgments, andassumptions, which are believed to be reasonable, based upon the informationavailable.  These estimates andassumptions affect the reported amounts of assets and liabilities at the dateof the consolidated financial statements and the reported amounts of income andexpenses during the periods presented. The following accounting policies comprise those that managementbelieves are the most critical to aid in fully understanding and evaluating ourreported consolidated financial results. These policies require numerous estimates or economic assumptions thatmay prove inaccurate or may be subject to variations which may significantlyaffect our reported results and financial condition for the period or in futureperiods.

 

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

 

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

 

*Income Taxes.*We make estimates and judgments to calculate some ofour tax liabilities and determine the recoverability of some of our deferredtax assets, which arise from temporary differences between the tax andfinancial statement recognition of revenues and expenses.  We also estimate a deferred tax assetvaluation allowance if, based on the available evidence, it is more likely thannot that some portion or all of the recorded deferred tax assets will not berealized in future periods.  These estimatesand judgments are inherently subjective. Historically, our estimates and judgments to calculate our deferred taxaccounts have not required significant revision to our initial estimates.

 

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

 

*Other than Temporary Impairment of Securities.** *Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such 

 

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evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether or not the Bank intends to sell or expects that it is more likely than not that it will be required to sell the security prior to an anticipated recovery in fair value.  Once a decline in value for a debt security is determined to be other-than-temporary, the other-than-temporary impairment is separated into (a) the amount of total other-than-temporary impairment related to a decrease in cash flows expected to be collected from debt security (the credit loss) and (b) the amount of other-than-temporary impairment related to all other factors.  The amount of the total other-than-temporary impairment related to credit loss is recognized in earnings.  The amount of other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss).

 

*Restricted Stock. *Restricted stock represents required investments in the common stock of a correspondent bank and is carried at cost. As of December 31, 2009 and December 31, 2008, restricted stock consists solely of the common stock of the Federal Home Loan Bank of Pittsburgh (“FHLB”).  In December of 2008, the FHLB notified member banks that it was suspending dividend payments and the repurchase of capital stock.

 

Management’s evaluation and determination of whether this investment is impaired is based on its assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value.  The determination of whether a decline affects the ultimate recoverability of an investment’s cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.

 

**Financial Condition**

 

The Bank’s total assets increased $40.1 million or 9.5% to $464.2million at December 31, 2009, compared to $424.1 million at December 31,2008.  This increase can be attributed toa $46.6 million or 164.7% increase in cash and cash equivalents, a $6.6 millionor 2.4% increase in loans receivable, a $3.0 million increase in OREO, and a$2.0 million increase in prepaid FDIC premium assessments.  These increases were offset by an $8.9million or 23.6% decrease in investment securities available for sale, an $8.6million or 26.8% decrease mortgage backed securities, and an $810,000 decreasein investment securities held to maturity. The increase in total cash and cash equivalents was primarily attributedto an increase in customer deposits as well as the decrease in investmentsecurities available for sale that resulted from certain securities beingcalled by the issuers and the decrease in mortgage backed securities availablefor sale which was due to normal principal repayments.  The Bank intends to consider using a portionof its cash and cash equivalents to repay $32.0 million in FHLB advances whichmature in 2010.  New loan productionamounted to $65.6 million for 2009 and included $14.9 million in residentialand consumer lending, $43.0 million in commercial and business lending and $7.7million in real estate construction lending. The Bank’s net loans receivable outstanding at December 31, 2009grew $6.6 million or 2.4% to $285.0 million as compared to $278.4 million at December 31,2008.  The Bank remains committed tocontinuing its lending emphasis on developing and growing new and existingrelationships with both retail and commercial customers.

 

Total liabilities increased $40.6 million or 10.8% to $415.8 million atDecember 31, 2009, compared to $375.2 million at December 31,2008.  This increase was primarily due toan increase of $44.7 million or 14.1% in interest bearing deposits and a $1.9million or 13.9% increase in non-interest bearing deposits.  The increase was partially offset by a $5.0million or 13.5% decrease in FHLB advances. Stockholders’ equity decreased $454,000 or 0.9% to $48.4 million as of December 31,2009 compared to $48.9 million at December 31, 2008.  Beginning in January of 2009, theCompany commenced a 292,612 share repurchase program and has repurchased228,000 shares of its common stock at an average price of $8.42 per sharethrough December 31, 2009, which decreased stockholders’ equity by $1.9million.  The decrease was partiallyoffset by net income of $1.4 million in 2009.

 

The Bank’s nonperforming assets, which consist of nonaccruing loans,accruing loans 90 days or more delinquent and other real estate owned (whichincludes real estate acquired through, or in lieu of, foreclosure) increased to$10.8 million or 2.33% of total assets at December 31, 2009 from $7.0million or 1.65% of total assets at December 31, 2008.  At December 31, 2009, the Bank’s $10.8million of nonperforming assets consisted of $1.4 million of accruing loans 90days or more delinquent, $6.5 million of nonaccrual loans and $3.0 million inOREO.  At December 31, 2009,nonperforming loans consisted of $1.7 million in single-family residential realestate loans, $3.7 million of land and construction loans, $1.8 million incommercial real estate loans, $472,000 in commercial business loans, and$153,000 in consumer and other loans.  AtDecember 31, 2008, nonperforming loans consisted of $2.5 million insingle-family residential real estate loans, $3.6 million in commercial realestate loans, $896,000 

 

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in real estate construction loans, and $75,000 in consumer and otherloans.  The Bank’s management continuesto aggressively pursue the collection and resolution of all delinquent loans.

 

The Bank strives tomaintain current valuations of the collateral supporting its impaired loans aswell as other real estate owned.  In mostcases, the Bank utilizes external appraisals to determine the estimated fairvalue of the underlying collateral when measuring for impairment.  As part of its valuation analysis, managementconsiders the timing and reliability of the original appraisal, the originalloan-to-value, the Bank’s overall exposure and current market conditions.  As part of our analysis, discounts may beapplied to any collateral valuations that were performed more than six monthsprior to the reporting date.

 

At December 31,2009, the Bank’s total allowance for loan losses amounted to $3.5 million, ascompared to $3.2 million at December 31, 2008.  The increase was due to $528,000 inprovisions to maintain an appropriate allowance level in light of factors suchas the level of nonperforming loans and the current economic environment.  In addition, in 2009, the Bank’s netcharge-offs amounted to $159,000.  At December 31,2009, the Bank’s allowance for loan losses amounted to 45.1% of totalnonperforming loans and 1.23% of total loans receivable, as compared to 45.3%and 1.13%, respectively, at December 31, 2008 and 135.00% and 1.09% at December 31,2007.  The decrease in allowance for loanloss to total nonperforming loans from 2007 to 2008 was due to our analysis ofthe underlying real estate collateral securing these loans which warrantedlittle additional reserves in most cases.

 

Although management usesthe best information available to make determinations with respect to theprovisions for loan losses, additional provisions for loan losses may berequired to be established in the future should economic or other conditionschange substantially.  In addition, thePennsylvania Department of Banking and the FDIC, as an integral part of theirexamination process, periodically review the Bank’s allowance for loanlosses.  Such agencies may require theBank to recognize additions to such allowance based on their judgments aboutinformation available to them at the time of their examination.

 

**Results of Operations**

 

**General**. The Bank recorded net income of $1.4 million for the year ended December 31,2009 as compared to net income of $605,000 million in 2008.  Net interest income increased $740,000 forthe year ended December 31, 2009, compared to 2008, primarily due to a$2.2 million decrease in interest expense as a result of decreasing interestrates paid on deposits during 2009 and 2008. During 2008, the Federal ReserveBoard reduced the key short-term rate seven times from 4.25% at December 31,2007 to a range of 0% to 0.25% at December 31, 2008.  Other income increased $923,000 or 383.0% forthe year ended December 31, 2009, compared to 2008  This increase was primarily attributable tothe prior year $882,000 impairment charge on certain mutual funds and a$158,000 loss on the sale of certain mutual funds recorded during 2008 offsetby a reduction in service charges.  Otherexpenses increased by $597,000 or 5.8% for the year ended December 31,2009, compared to 2008, offset by a $1.5 million decrease on interest earned ininterest earning assets.  This increaseis primarily due to increases in salaries and employee benefits expense, anincrease in FDIC deposit insurance premiums, and an increase in provision forloss on OREO when comparing 2009 to 2008. The increase in salaries and employee benefits was primarily attributedto a higher level of staff members and annual increases in employees’salaries.  The increase in FDIC depositinsurance premiums included a $195,000 charge for the FDIC special assessmentthe Company paid in September of 2009. The increase in the provision for loss on OREO was the result of ouranalysis of the underlying real estate which warranted an additionalreserve.  The provision for loan lossesdecreased $57,000 primarily due to a lower amount of charge-offs in 2009 ascompared to 2008.  For 2009, the Companyrecorded a $41,000 income tax benefit compared to a $411,000 tax benefit for2008.  The income tax benefit decreaseddue to a higher amount of pretax income for the year ended December 31,2009, compared to 2008.

 

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

 
| ** **                                                        | ** ** | **At**            | ** ** | ** **                                 | ** **  | ** **   | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|-------------------|------------|--------------------------------------------|-------------|--------------|------------|------------|------------|-------------|------------|--------------|------------|------------|------------|-------------|------------|--------------|------------|------------|------------|
| ** **                                                        | ** ** | **Dec. 31,** | ** ** | **Year Ended December 31,** | ** **  |
| ** **                                                        | ** ** | **2009**          | ** ** | **2009**                                   | ** **  | **2008**     | ** ** | **2007**   | ** ** |
| ** **                                                        | ** ** | **Yield/**        | ** ** | **Average**                                | ** **  | ** **   | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** **   | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** **   | ** ** | **Yield/** | ** ** |
| **(Dollars in Thousands)**                              | ** ** | **Rate**          | ** ** | **Balance**                                | ** **  | **Interest** | ** ** | **Rate**   | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate**   | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate**   | ** ** |
| ** **                                                        | ** ** | ** **        | ** ** | ** **                                 | ** **  | ** **   | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | ** ** | ** ** |
| **Interest-earning assets:**                                      |       |              |       |                                       |        |         |       |       |       |        |       |         |       |       |       |        |       |         |       |       |       |
| Loans  receivable (1) (2)                                    | ** ** | **6.03**          | %          | **$**                                      | **283,736** | ** **   | **$**      | **17,024** | ** ** | **6.00**    | %          | $            | 271,859    |       | $          | 17,485      |       | 6.43         | %          | $          | 247,157    |   | $ | 16,966 |   | 6.86 | % |
| Mortgage-backed  securities                                       |       | **4.49**          |       | **28,897**                                 |        | **1,230**    |       | **4.26**   |       | 32,531      |       | 1,493        |       | 4.59       |       | 39,660      |       | 1,816        |       | 4.58       |       |
| Investment  securities (4)                                        | ** ** | **4.27**          | ** ** | **58,383**                                 | ** **  | **2,638**    | ** ** | **4.52**   |       | 59,568      |       | 2,852        |       | 4.79       |       | 64,983      |       | 3,333        |       | 5.13       |       |
| Other  interest-earning assets                                    |       | **0.41**          |       | **44,065**                                 |        | **199**      |       | **0.45**   |       | 36,021      |       | 712          |       | 1.98       |       | 46,200      |       | 2,225        |       | 4.82       |       |
| Total  interest-earning assets                                    |       | **4.86**          |       | **415,081**                                |        | **21,091**   |       | **5.08**   |       | 399,979     |       | 22,542       |       | 5.64       |       | 398,000     |       | 24,340       |       | 6.12       |       |
| Noninterest-earning  assets                                       | ** ** | ** **        |       | **25,774**                                 |        |         |       |       |       | 23,028      |       |         |       |       |       | 22,741      |       |         |       |       |       |
| Total  assets                                                     | ** ** |              |       | **$**                                      | **440,855** |         |       |       |       |        | $          | 423,007      |       |       |       |        |       | $            | 420,741    |       |       |   |   |   |
| ** **                                                        |       |              |       |                                       |        |         |       |       |       |        |       |         |       |       |       |        |       |         |       |       |       |
| **Interest-bearing liabilities:**                                 |       |              |       |                                       |        |         |       |       |       |        |       |         |       |       |       |        |       |         |       |       |       |
| Deposits                                                          | ** ** | **1.77**          | ** ** | **$**                                      | **335,864** | ** **   | **7,287**  | ** ** | **2.17**   |        | $          | 314,457      |       | 9,331      |       | 2.97        |       | $            | 310,112    |       | 11,618     |   | 3.75 |   |
| FHLB advances and  other borrowings                               |       | **6.31**          |       | **34,811**                                 |        | **2,222**    |       | **6.38**   |       | 37,815      |       | 2,370        |       | 6.27       |       | 37,356      |       | 2,381        |       | 6.37       |       |
| Total  interest-bearing liabilities                               |       | **2.13**          |       | **370,675**                                |        | **9,509**    |       | **2.57**   |       | 352,272     |       | 11,701       |       | 3.32       |       | 347,468     |       | 13,999       |       | 4.03       |       |
| Noninterest-bearing  liabilities                                  |       |              |       | **21,331**                                 |        |         |       |       |       | 20,883      |       |         |       |       |       | 24,800      |       |         |       |       |       |
| Total  liabilities                                                | ** ** |              |       | **392,006**                                |        |         |       |       |       | 373,155     |       |         |       |       |       | 372,268     |       |         |       |       |       |
| Stockholders’  equity                                        | ** ** |              |       | **48,849**                                 |        |         |       |       |       | 49,852      |       |         |       |       |       | 48,473      |       |         |       |       |       |
| Total liabilities  and stockholders’ equity                  |       |              |       | **$**                                      | **440,855** |         |       |       |       |        | $          | 423,007      |       |       |       |        |       | $            | 420,741    |       |       |   |   |   |
|                                                              | ** ** |              |       | ** **                                 | ** **  |         |       |       |       |        |       |         |       |       |       |        |       |         |       |       |       |   |   |   |
| Net  interest-earning assets                                      | ** ** |              |       | **$**                                      | **44,406**  |         |       |       |       |        | $          | 47,707       |       |       |       |        |       | $            | 50,532     |       |       |   |   |   |
| Net interest  income/interest rate spread                         |       | **2.73**          | **%**      |                                       |        | **$**        | **11,582** |       | **2.51**   | **%**       |       |         | $          | 10,841     |       | 2.32        | %          |         |       | $          | 10,341     |   | 2.09 | % |
| Net yield on  interest- earning assets (3) (4)               |       |              |       |                                       |        |         |       | **2.79**   | **%**      |        |       |         |       | 2.71       | %          |        |       |         |       | 2.60       | %          |
| Ratio of  interest-earning assets to interest-bearing liabilities |       |              |       |                                       |        |         |       | **111.98** | **%**      |        |       |         |       | 113.54     | %          |        |       |         |       | 114.54     | %          |

 

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| (1) | Includes loans held for sale, if any.                              |
|-----|--------------------------------------------------------------------|
| (2) | Nonaccrual loans  and loan fees have been included.                |
| (3) | Net interest  income divided by interest-earning assets.           |
| (4) | The indicated yields are not reflected on a tax  equivalent basis. |

 

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

 
| ** **                          | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **2009 vs. 2008**                | ** ** |
| ** **                          | ** ** | **Increase**                     | ** ** |
| ** **                          | ** ** | **(Decrease) Due To**            | ** ** |
| ** **                          | ** ** | ** **                       | ** ** | ** ** | ** ** | **Total** | ** ** |
| ** **                          | ** ** | ** **                       | ** ** | ** ** | ** ** | **Increase** | ** ** |
| **(Dollars  in Thousands)**         | ** ** | **Rate**                         | ** ** | **Volume** | ** ** | **(Decrease)** | ** ** |
|                                |       |                             |       |   |   |   |   |
| Interest-earning  assets:           |       |                             |       |   |   |   |   |
| Loans  receivable                   |       | $                                | (1,079     | ) | $ | 617 |   | $ | (462 | ) |
| Mortgage-backed  securities         |       | (102                             | )          | (162 | ) | (264 | ) |
| Investment  securities              |       | (160                             | )          | (54 | ) | (214 | ) |
| Other  interest-earning assets      |       | (498                             | )          | (14 | ) | (512 | ) |
| Total  interest-earning assets      |       | (1,839                           | )          | 387 |   | (1,452 | ) |
| Interest-bearing  liabilities:      |       |                             |       |   |   |   |   |
| Deposits                            |       | (2,451                           | )          | 407 |   | (2,044 | ) |
| FHLB  advances and other borrowings |       | 39                               |       | (187 | ) | (148 | ) |
| Total  interest-bearing liabilities |       | (2,412                           | )          | 220 |   | (2,192 | ) |
|                                |       |                             |       |   |   |   |   |
| Increase  in net interest income    |       | $                                | 573        |   | $ | 167 |   | $ | 740 |   |

 

**NetInterest Income.**  Net interest income is determined by the Bank’sinterest rate spread (i.e., the difference between the yields earned on itsinterest-earning assets and the rates paid on its interest-bearing liabilities)and the relative amounts of interest-earning assets and interest-bearingliabilities.  Interest expense decreased$2.2 million or 18.7% in 2009 compared to 2008 which more than offset adecrease of $1.5 million or 6.4% in interest income.  Net interest income increased $740,000 or6.8% to $11.6 million for the year ended December 31, 2009 compared to 2008.This increase was primarily due to a decrease in rates paid on interest bearingdeposits and a decrease in interest income on loans, partially offset by adecrease in the interest income on investment securities and interest income onbalances from depository institutions. In December 31, 2008 the FHLB notified member banks that it wassuspending dividend payments and the repurchase of capital stock.

 

**Interestand Dividend Income.**  Interest income decreased $1.5 million or6.4% to $21.1 million for the year ended December 31, 2009, compared tothe same period in 2008.  The decreasewas primarily due to a $513,000 or 72.1% decrease in interest income onbalances due from depository institutions, a $214,000 or 7.50% decrease ininterest income on investment securities, and a $264,000 or 17.7% decrease ininterest income earned on mortgage backed securities, and a $461,000 or 2.6%decrease in interest income earned on loans. The decrease in interest due from depository institutions was due to a153 basis point or 77.3% (one basis point is equal to 1/100 of a percent)decrease in the average yield earned on balances due from depositoryinstitutions, partially offset by an $8.0 million or 22.3% increase in theaverage balance of balances due from depository institutions.  The decrease in interest income on investmentsecurities was due to a $1.2 million or 2.0% decrease in average balance ofinvestment securities and a 27 basis point or 5.6% decrease in the averageyield earned on investment securities. The decrease in interest income on mortgage backed securities wasprimarily due to a $3.6 million or 11.2% decrease in the average balance ofmortgage backed securities and a 33 or 7.2% basis point decrease in the averageyield earned on mortgage backed securities. The decrease in interest income on loans was primarily due to a 43 or6.7% basis point decrease in the average yield earned on loans, partiallyoffset by a $11.9 million or 4.4% increase in the average balance of loansoutstanding.

 

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**Interest Expense.**  Interestexpense decreased $2.2 million or 18.7% to $9.5 million for the year ended December 31,2009, compared to the same period in 2008. This decrease was primarily due to a decrease of $2.0 million or 21.9%in interest expense on deposits and a decrease of $148,000 or 6.2% in interestexpense on FHLB advances and other borrowings. The decrease in interest expense on deposits was primarily due to a 80basis point or 27.0% decrease in the average rate paid partially offset by a$21.4 million or 6.8% increase in the average balance outstanding.  The decrease in interest expense on FHLBadvances and other borrowings was due to a $3.0 million or 7.9% decrease in theaverage balance outstanding, partially offset by an 11 or 1.8% basis pointincrease in the average rates paid on FHLB advances.

 

**Provision for Loan Losses. **The Bank establishes provisions for loan losses, whichare charges to operating results, in order to maintain a level of totalallowance for loan losses that management believes, to the best of itsknowledge, covers all known and inherent losses that are both probable andreasonably estimable, at each reporting date. The allowance is based upon an assessment of prior loss experience, thevolume and type of lending conducted by the Bank, industry standards, past dueloans, current economic conditions in the Bank’s market area and other factorsrelated to the collectibility of the Bank’s loan portfolio.  The provision for loan losses amounted to$528,000 and $585,000 for the years ended December 31, 2009 and 2008,respectively.

 

**Other Income.**  Total otherincome increased $923,000 or 383.0% to $1.2 million for the year ended December 31,2009, compared to the same period in 2008. This decrease is primarily attributable to the prior year $882,000impairment charge on certain mutual funds and a $158,000 loss on the sale ofcertain mutual funds recorded during 2008. The Bank has collected a management fee from Alliance Mutual HoldingCompany which reimburses the Bank for certain salary and overhead costs theBank incurs on behalf of the mutual holding company.  The management fees for 2009 and 2008 were$360,000 and $384,000, respectively.

 

**Other Expenses.**  Ournon-interest expenses amounted to $10.9 million and $10.3 million for the yearsended December 31, 2009 and 2008, respectively.  This increase is primarily due to increasesin salaries and employee benefits expense, an increase in FDIC depositinsurance premiums, and an increase in provision for loss on OREO whencomparing 2009 to 2008.  The increase insalaries and employee benefits was primarily attributed to a higher level ofstaff members and modest annual increases in employees’ salaries.  The increase in FDIC deposit insurancepremiums included a $195,000 charge for the FDIC special assessment the Companypaid in September of 2009.  Theincrease in the provision for loss on OREO is the result of our analysis of theunderlying real estate which warranted an additional reserve.  As of December 31, 2009, the Bank had$3.0 million in OREO compared to no OREO at December 31, 2008.

 

**Income Tax Benefit.**  Income taxbenefit amounted to $41,000 and $411,000 for the years ended December 31,2009 and 2008, respectively, resulting in effective tax rates of (3.1)% and(211.6)%, respectively.  The decrease inincome tax benefit for the year ended December 31, 2009 was primarily dueto higher pre-tax income in 2009 compared to 2008.  The tax benefit primarily resulted from taxexempt income from Bank-owned life insurance and certain tax-exempt securitiespurchased by the Bank.

 

**Liquidity and Capital Resources**

 

The Bank’s liquidity, represented by cash and cashequivalents, is a product of its cash flows from operations.  The Bank’s primary sources of funds aredeposits, borrowings, amortization, prepayments and maturities of outstandingloans and mortgage-backed securities, sales of loans, maturities and calls ofinvestment securities and other short-term investments and income fromoperations.  Changes in the cash flows ofthese instruments are greatly influenced by economic conditions andcompetition.  After the completion of itsreorganization and stock offering in January of 2007, the Bank’s liquidityand capital position were further strengthened resulting from $16.5 million innet proceeds from the stock offering. The Bank attempts to balance supply and demand by managing the pricingof its loan and deposit products while maintaining a level of growth consistentwith the conservative operating philosophy of the management and board ofdirectors.  Any excess funds are investedin overnight and other short-term interest-earning accounts.  The Bank generates cash flow through theretail deposit market, its traditional funding source, for use in investingactivities.  In addition, the Bank mayutilize borrowings such as Federal Home Loan Bank advances for liquidity orprofit enhancement.  At December 31,2009, the Bank had $32.0 million of outstanding advances and $108.1 million ofadditional borrowing capacity from the FHLB of Pittsburgh.  The Bank is reviewing its continuedutilization of advances from the FHLB as a source of funding based upon recentdecisions by the FHLB to suspend the dividend on, and restrict the repurchaseof, FHLB stock.  The $32.0 million inFHLB advances is due throughout 2010 with $6.0 million due in the first quarterof 2010, $22.0 million due in the second quarter of 2010, and $5.0 million duein the third quarter of 2010.  On February 3,2010, the Bank repaid $6.0 million with cash on hand.  Management is currently analyzing how to bestrepay the remaining $26.0 million.  FHLBstock is required to be held when advances from the FHLB are taken.  Further, the Bank has access to the 

 

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Federal Reserve Bank discount window.  At December 31, 2009, the Bank had nosuch funds outstanding from the Federal Reserve Bank.

 

The primary use of funds is to meet ongoing loan andinvestment commitments, to pay maturing savings certificates and savingswithdrawals and expenses related to general operations of the Bank.  At December 31, 2009, the total approvedloan commitments outstanding amounted to $7.8 million.  At the same date, commitments under unusedlines of credit amounted to $30.5 million. Certificates of deposit scheduled to mature in one year or less at December 31,2009, totaled $200.1 million.  Managementbelieves that a significant portion of maturing deposits will remain with theBank.  Investment and mortgage-backedsecurities totaled $75.7 million at December 31, 2009, of which $1.5million are scheduled to mature or reprice in one year or less.  The Bank anticipates that it will continue tohave sufficient cash flows to meet its current and future commitments.

 

**Bank Regulatory Capital Requirements**

 

The following table summarizes the Bank’s totalstockholder’s equity, FDIC regulatory capital, total FDIC risk-based assets,leverage and risk-based regulatory ratios at December 31, 2009.

 

*(Dollars in Thousands)*

 
| Total  stockholder’s equity or GAAP capital (Bank) |   | $             | 46,232  |   |
|---------------------------------------------------------|--------|---------------|---------|--------|
| FDIC  adjustment for securities available-for-sale      |   | (519          | )       |
| FDIC  adjustment for retirement plans                   |   | 1,102         |    |
| FDIC  tier 1 capital                                    |   | 46,815        |    |
| Plus:  FDIC tier 2 capital (1)                          |   | 3,538         |    |
| Total  FDIC risk-based capital                          |   | $             | 50,353  |   |
|                                                    |   |          |    |
| FDIC  quarterly average total assets for leverage ratio |   | $             | 460,375 |   |
| FDIC  net risk-weighted assets                          |   | 293,199       |    |
|                                                    |   |          |    |
| FDIC  leverage capital ratio                            |   | 10.17         | %       |
| Minimum  requirement (2)                                |   | 4.00% to 5.00 | %       |
|                                                    |   |          |    |
| FDIC  risk-based capital - tier 1                       |   | 15.97         | %       |
| Minimum  requirement                                    |   | 4.00          | %       |
|                                                    |   |          |    |
| FDIC  total risk-based capital (tier 1 & 2)    |   | 17.17         | %       |
| Minimum  requirement                                    |   | 8.00          | %       |

 

----

(1)          Tier 2 capital consists entirely of the allowableportion of the allowance for loan losses, which is limited to 1.25% of totalrisk-weighted assets as detailed under regulations of the FDIC.

 

(2)          The FDIC has indicated that most highly rated institutionswhich meet certain criteria will be required to maintain a ratio of 3%, and allother institutions will be required to maintain an additional cushion of 100 to200 basis points.  As of December 31,2009, the Bank had not been advised of any additional requirements in thisregard.

 

**Recent Accounting Pronouncements**

 

ASU 2009-12, “Fair Value Measurements and Disclosures(Topic 820) - Investments in Certain Entities That Calculate Net Asset Valueper Share (or Its Equivalent),” issued in September, 2009, allows a company tomeasure the fair value of an investment that has no readily determinable fairmarket value on the basis of the investee’s net asset value per share asprovided by the investee. This allowance assumes that the investee has calculatednet asset value in accordance with the GAAP measurement principles of Topic 946as of the reporting entity’s measurement date.  Examples of such investments includeinvestments in hedge funds, private equity funds, real estate funds and venturecapital funds. The update also provides guidance on how the investment shouldbe classified within the fair value hierarchy based on the value for which theinvestment can be redeemed.  Theamendment is effective for interim and annual periods ending after December 15,2009 with early adoption permitted.  TheCompany does not have investments in such entities and, therefore, there willbe no impact to our financial statements.

 

Issued October, 2009, ASU 2009-15, “Accounting forOwn-Share Lending Arrangements in Contemplation of 

 

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Convertible Debt Issuance or Other Financing” amendsASC Topic 470 and provides guidance for accounting and reporting for own-sharelending arrangements issued in contemplation of a convertible debt issuance.  At the date of issuance, a share-lendingarrangement entered into on an entity’s own shares should be measured at fairvalue in accordance with Topic 820 and recognized as an issuance cost, with anoffset to additional paid-in capital.  Loaned shares are excluded frombasic and diluted earnings per share unless default of the share-lendingarrangement occurs.  The amendments also require several disclosuresincluding a description and the terms of the arrangement and the reason forentering into the arrangement.  The effective dates of the amendments aredependent upon the date the share-lending arrangement was entered into andinclude retrospective application for arrangements outstanding as of thebeginning of fiscal years beginning on or after December 15,2009.   The Company has no plans to issue convertible debt and,therefore, does not expect the update to have an impact on its financialstatements.

 

In October 2009, the FASB issued ASU 2009-16,Transfers and Servicing (Topic 860) - Accounting for Transfers of FinancialAssets.  This Update amends theCodification for the issuance of FASB Statement No. 166, Accounting forTransfers of Financial Assets-an amendment of FASB Statement No. 140.  The amendments in this Update improvefinancial reporting by eliminating the exceptions for qualifyingspecial-purpose entities from the consolidation guidance and the exception thatpermitted sale accounting for certain mortgage securitizations when atransferor has not surrendered control over the transferred financial assets.In addition, the amendments require enhanced disclosures about the risks that atransferor continues to be exposed to because of its continuing involvement intransferred financial assets. Comparability and consistency in accounting for transferred financialassets will also be improved through clarifications of the requirements forisolation and limitations on portions of financial assets that are eligible forsale accounting.  This Update iseffective at the start of a reporting entity’s first fiscal year beginningafter November 15, 2009.  Earlyapplication is not permitted.  Theimplementation of this standard is not expected to have an impact on theCompany’s consolidated financial position or results of operations.

 

In October 2009, the FASB issued ASU 2009-17,Consolidations (Topic 810) - Improvements to Financial Reporting by EnterprisesInvolved with Variable Interest Entities. This Update amends the Codification for the issuance of FASB Statement No. 167,Amendments to FASB Interpretation No. 46(R).  The amendments in this Update replace thequantitative-based risks and rewards calculation for determining which reportingentity, if any, has a controlling financial interest in a variable interestentity with an approach focused on identifying which reporting entity has thepower to direct the activities of a variable interest entity that mostsignificantly impact the entity’s economic performance and (1) theobligation to absorb losses of the entity or (2) the right to receivebenefits from the entity. An approach that is expected to be primarilyqualitative will be more effective for identifying which reporting entity has acontrolling financial interest in a variable interest entity.  The amendments in this Update also requireadditional disclosures about a reporting entity’s involvement in variableinterest entities, which will enhance the information provided to users offinancial statements.  This Update iseffective at the start of a reporting entity’s first fiscal year beginningafter November 15, 2009.  Earlyapplication is not permitted.  Theimplementation of this standard is not expected to have an impact on the Company’sconsolidated financial position or results of operations.

 

In January 2010, the FASB issued ASU 2010-01,Equity (Topic 505) - Accounting for Distributions to Shareholders withComponents of Stock and Cash.  Theamendments in this Update clarify that the stock portion of a distribution toshareholders that allows them to elect to receive cash or stock with apotential limitation on the total amount of cash that all shareholders canelect to receive in the aggregate is considered a share issuance that isreflected in earnings per share prospectively and is not a stock dividend.  This Update codifies the consensus reached inEITF Issue No. 09-E, “Accounting for Stock Dividends, IncludingDistributions to Shareholders with Components of Stock and Cash.”   This Update is effective for interim andannual periods ending on or after December 15, 2009, and should be appliedon a retrospective basis.  Theimplementation of this standard is not expected to have an impact on theCompany’s consolidated financial position or results of operations.

 

In January 2010, the FASB issued ASU 2010-02,Consolidation (Topic 810) - Accounting and Reporting for Decreases in Ownershipof a Subsidiary - A Scope Clarification. This Update clarifies that the scope of the decrease in ownershipprovisions of Subtopic 810-10 and related guidance applies to: a subsidiary orgroup of assets that is a business or nonprofit activity; a subsidiary that isa business or nonprofit activity that is transferred to an equity methodinvestee or joint venture; and an exchange of a group of assets thatconstitutes a business or nonprofit activity for a noncontrolling interest inan entity (including an equity method investee or joint venture). This Updatealso clarifies that the decrease in ownership guidance in Subtopic 810-10 doesnot apply to: (a) sales of in substance real estate; and (b) conveyancesof oil and gas mineral rights, even if these transfers involve businesses.  The amendments in this Update expand thedisclosure requirements about deconsolidation of a subsidiary or derecognitionof a group of assets to include:  thevaluation techniques used to measure the fair value of any retained investment;the nature of any continuing involvement with the subsidiary or entityacquiring the group of assets; and whether the transaction that resulted in thedeconsolidation or derecognition was with a related party or whether the 

 

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former subsidiary or entity acquiring the assets willbecome a related party after the transaction. This Update is effective beginning in the period that an entity adoptsFASB Statement No. 160, Noncontrolling Interests in Consolidated FinancialStatements - an amendment of ARB 51 (now included in Subtopic 810-10).  If an entity has previously adopted Statement160, the amendments are effective beginning in the first interim or annual reportingperiod ending on or after December 15, 2009.  The amendments in this Update should beapplied retrospectively to the first period that an entity adopts Statement160.  The implementation of this standardis not expected to have an impact on the Company’s consolidated financialposition or results of operations.

 

The FASB has issued ASU 2010-06, Fair ValueMeasurements and Disclosures (Topic 820): Improving Disclosures about FairValue Measurements. This ASU requires some new disclosures and clarifies someexisting disclosure requirements about fair value measurement as set forth inCodification Subtopic 820-10. The FASB’s objective is to improve thesedisclosures and, thus, increase the transparency in financial reporting.Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require:   a reporting entity to disclose separatelythe amounts of significant transfers in and out of Level 1 and Level 2 fairvalue measurements and describe the reasons for the transfers; and in thereconciliation for fair value measurements using significant unobservableinputs, a reporting entity should present separately information aboutpurchases, sales, issuances, and settlements. In addition, ASU 2010-06 clarifies the requirements of the followingexisting disclosures: for purposes of reporting fair value measurement for eachclass of assets and liabilities, a reporting entity needs to use judgment indetermining the appropriate classes of assets and liabilities; and a reportingentity should provide disclosures about the valuation techniques and inputsused to measure fair value for both recurring and nonrecurring fair valuemeasurements.  ASU 2010-06 is effectivefor interim and annual reporting periods beginning after December 15,2009, except for the disclosures about purchases, sales, issuances, andsettlements in the roll forward of activity in Level 3 fair value measurements.Those disclosures are effective for fiscal years beginning after December 15,2010, and for interim periods within those fiscal years. Early adoption ispermitted.  The Company is currentlyreviewing the effect this new pronouncement will have on its consolidatedfinancial statements.

 

**Impact of Inflation and Changing Prices**

 

The consolidated financial statements and relatedfinancial data presented herein have been prepared in accordance withaccounting principles generally accepted in the United States of America, whichrequire the measurement of financial position and operating results in terms ofhistorical dollars, without considering changes in relative purchasing powerover time due to inflation.  Unlike mostindustrial companies, virtually all of the Bank’s assets and liabilities aremonetary in nature.  As a result,interest rates generally have a more significant impact on a financialinstitution’s performance than does the effect of inflation.

 

**Forward-Looking Statements**

 

This Report contains certain forward-lookingstatements and information relating to the Company that are based on thebeliefs of management as well as assumptions made by and information currentlyavailable to management.  In addition, inthose and other portions of this document, the words “anticipate,” “believe,” “estimate,”“except,” “intend,” “should” and similar expressions, or the negative thereof,as they relate to the Company or the Company’s management, are intended toidentify forward-looking statements. Such statements reflect the current views of the Company with respect tofuture looking events and are subject to certain risks, uncertainties and assumptions.  Should one or more of these risks oruncertainties materialize or should underlying assumptions prove incorrectactual results may vary materially from those described herein as anticipated,believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements.

 

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**Item8.  Financial Statements andSupplementary Data.**

 

**Report of Independent RegisteredPublic Accounting Firm**

 

To theBoard of Directors and

Stockholdersof Alliance Bancorp, Inc. of Pennsylvania

 

We have audited the accompanying consolidated statements offinancial condition of Alliance Bancorp, Inc. of Pennsylvania andsubsidiaries (“the Company”) as of December 31, 2009 and December 31,2008, and the related consolidated statements of income, changes instockholders’ equity, and cash flows for each of the years in the two-yearperiod ended December 31, 2009. Alliance Bancorp, Inc. of Pennsylvania’smanagement is responsible for these consolidated financial statements. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits in accordance with the standards of thePublic Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. The Companyis not required to have, nor were we engaged to perform, an audit of itsinternal control over financial reporting. Our audits included consideration ofinternal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion. An auditalso includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Alliance Bancorp, Inc. of Pennsylvania and subsidiaries as of December 31,2009 and 2008, and the results of their operations and their cash flows foreach of the years in the two-year period ended December 31, 2009, inconformity with accounting principles generally accepted in the United Statesof America.

 

 

/s/ ParenteBeard LLC

ParenteBeard LLC

Malvern, Pennsylvania

March 16, 2010

 

 

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**Alliance Bancorp, Inc. of Pennsylvania andSubsidiaries**

**ConsolidatedStatements of Financial Condition**

 
| ** **                                                                                                                                | ** ** | **December 31,** | ** **      |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-----------------|
| ** **                                                                                                                                | ** ** | **2009**              | ** **      | **2008** | ** ** |
| ** **                                                                                                                                |       |                  |            |   |   |
| **Assets**                                                                                                                                |       |                  |            |   |   |
| Cash  and cash due from depository institutions                                                                                           | ** ** | **$**                 | **5,710,340**   |   | $ | 7,849,024 |   |
| Interest  bearing deposits with depository institutions                                                                                   | ** ** | **69,225,763**        |            | 20,458,632 |   |
| Total  cash and cash equivalents                                                                                                          | ** ** | **74,936,103**        |            | 28,307,656 |   |
|                                                                                                                                      |       |                  |            |   |   |
| Investment  securities available for sale                                                                                                 | ** ** | **28,889,850**        |            | 37,814,226 |   |
| Mortgage-backed  securities available for sale                                                                                            | ** ** | **23,355,025**        |            | 31,920,757 |   |
| Investment  securities held to maturity (fair value - 2009, $23,796,424; 2008,  $23,958,326)                                              |       | **23,445,803**        |            | 24,255,762 |   |
| Loans receivable  - net of allowance for loan losses - 2009, $3,537,736; 2008, $3,169,118                                                 |       | **285,007,578**       |            | 278,436,554 |   |
| Accrued  interest receivable                                                                                                              | ** ** | **2,045,466**         |            | 2,028,079 |   |
| Premises  and equipment - net                                                                                                             | ** ** | **2,530,550**         |            | 2,764,353 |   |
| Other  real estate owned                                                                                                                  | ** ** | **2,968,139**         | ** **      | **—** | ** ** |
| Federal  Home Loan Bank (FHLB) stock-at cost                                                                                              | ** ** | **2,438,800**         |            | 2,438,800 |   |
| Bank  owned life insurance                                                                                                                | ** ** | **11,185,302**        |            | 10,830,059 |   |
| Deferred  tax asset-net                                                                                                                   | ** ** | **4,546,254**         |            | 4,328,167 |   |
| Prepaid  FDIC premium assessment                                                                                                          | ** ** | **2,034,041**         | ** **      | **—** | ** ** |
| Prepaid  expenses and other assets                                                                                                        | ** ** | **833,332**           |            | 985,253 |   |
| ** **                                                                                                                                |       |                  |            |   |   |
| **Total Assets**                                                                                                                          |       | $                     | **464,216,243** |   | $ | 424,109,666 |   |
| ** **                                                                                                                                | ** ** | ** **            | ** **      | ** ** | ** ** |
| **Liabilities and Stockholders’ Equity**                                                                                             |       |                  |            |   |   |
| ** **                                                                                                                                | ** ** | ** **            | ** **      | ** ** | ** ** |
| **Liabilities**                                                                                                                           |       |                  |            |   |   |
| Non-interest  bearing deposits                                                                                                            | ** ** | **$**                 | **15,506,305**  |   | $ | 13,609,911 |   |
| Interest  bearing deposits                                                                                                                | ** ** | **362,817,118**       |            | 318,091,491 |   |
| Total  deposits                                                                                                                           | ** ** | **378,323,423**       |            | 331,701,402 |   |
|                                                                                                                                      |       |                  |            |   |   |
| Demand  notes issued to the U.S. Treasury                                                                                                 | ** ** | **20,535**            |            | 197,810 |   |
| FHLB  advances                                                                                                                            | ** ** | **32,000,000**        |            | 37,000,000 |   |
| Accrued  expenses and other liabilities                                                                                                   | ** ** | **5,427,662**         |            | 6,311,416 |   |
|                                                                                                                                      |       |                  |            |   |   |
| Total  liabilities                                                                                                                        | ** ** | **415,771,620**       |            | 375,210,628 |   |
|                                                                                                                                      |       |                  |            |   |   |
| Commitments  and Contingencies (Note 10)                                                                                                  |       |                  |            |   |   |
| ** **                                                                                                                                | ** ** | ** **            | ** **      | ** ** | ** ** |
| **Stockholders’ Equity**                                                                                                             |       |                  |            |   |   |
| Common stock,  $.01 par value; shares authorized -15,000,000: shares issued—7,225,000;  outstanding-2009, 6,729,676; 2008, 6,957,676 |       | **72,250**            |            | 72,250 |   |
| Additional  paid-in capital                                                                                                               | ** ** | **24,015,125**        |            | 24,029,125 |   |
| Retained  earnings - partially restricted                                                                                                 | ** ** | **29,847,311**        |            | 28,836,350 |   |
| Unearned  shares held by Employee Stock Ownership Plan (ESOP)                                                                             | ** ** | **(602,229**          | **)**           | (722,664 | ) |
| Accumulated  other comprehensive loss                                                                                                     | ** ** | **(582,743**          | **)**           | (930,044 | ) |
| Treasury  stock, at cost: 2009, 495,324 shares; 2008, 267,324 shares                                                                      | ** ** | **(4,305,091**        | **)**           | (2,385,979 | ) |
|                                                                                                                                      |       |                  |            |   |   |
| Total  stockholders’ equity                                                                                                          | ** ** | **48,444,623**        |            | 48,899,038 |   |
|                                                                                                                                      |       |                  |            |   |   |
| **Total Liabilities and Stockholders’ Equity**                                                                                       | ** ** | **$**                 | **464,216,243** |   | $ | 424,109,666 |   |

 

*See notes to consolidated financial statements.*

 

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**Alliance Bancorp, Inc. of Pennsylvania andSubsidiaries**

**ConsolidatedStatements of Income**

 
| ** **                                                     | ** ** | **Years Ended December 31,** | ** **     |
|----------------------------------------------------------------|------------|---------------------------------------------|----------------|
| ** **                                                     | ** ** | **2009**                                    | ** **     | **2008** | ** ** |
| ** **                                                     |       |                                        |           |   |   |
| **Interest and Fees and Dividend Income**                      |       |                                        |           |   |   |
| Loans                                                          | ** ** | **$**                                       | **17,023,648** | ** ** | **$** | 17,485,366 | ** ** |
| Mortgage-backed  securities                                    | ** ** | **1,229,896**                               |           | 1,493,761 |   |
| Investment  securities:                                        |       |                                        |           |   |   |
| Taxable                                                        | ** ** | **1,467,183**                               |           | 1,379,451 |   |
| Tax –  exempt                                             | ** ** | **1,170,945**                               |           | 1,091,068 |   |
| Dividends                                                      |       | —                                      |           | 381,375 |   |
| Balances  due from depository institutions                     | ** ** | **199,192**                                 |           | 711,672 |   |
| Total  interest and dividend income                            | ** ** | **21,090,864**                              |           | 22,542,693 |   |
| ** **                                                     |       |                                        |           |   |   |
| **Interest Expense**                                           |       |                                        |           |   |   |
| Deposits                                                       | ** ** | **7,287,079**                               |           | 9,330,875 |   |
| FHLB  advances and other borrowed money                        | ** ** | **2,222,226**                               |           | 2,370,614 |   |
| Total  interest expense                                        | ** ** | **9,509,305**                               |           | 11,701,489 |   |
| ** **                                                     | ** ** | ** **                                  |           |   |   |
| **Net Interest Income**                                        | ** ** | **11,581,559**                              |           | 10,841,204 |   |
| **Provision for Loan Losses**                                  | ** ** | **528,215**                                 |           | 585,000 |   |
| **Net Interest Income After Provision for Loan  Losses**       | ** ** | **11,053,344**                              |           | 10,256,204 |   |
| ** **                                                     |       |                                        |           |   |   |
| **Other Income**                                               |       |                                        |           |   |   |
| Service  charges on deposit accounts                           | ** ** | **292,720**                                 |           | 352,123 |   |
| Management  fees                                               | ** ** | **360,000**                                 |           | 384,000 |   |
| Other  fee income                                              | ** ** | **170,110**                                 |           | 169,408 |   |
| Gain  on sale of loans                                         |       | —                                      |           | 6,524 |   |
| Loss  on sale of investment securities, net                    |       | —                                      |           | (157,349 | ) |
| Loss  on sale of OREO, net                                     | ** ** | **(14,877**                                 | **)**          | — |   |
| Impairment  charge on investment securities                    |       | —                                      |           | (882,202 | ) |
| Portion  of loss recognized in other comprehensive loss, net   |       | —                                      |           | — |   |
| Net  impairment loss recognized in earnings                    |       | —                                      |           | (882,202 | ) |
| Increase  in cash surrender value of bank owned life insurance | ** ** | **355,243**                                 |           | 366,920 |   |
| Other                                                          | ** ** | **795**                                     |           | 1,439 |   |
| Total  other income                                            | ** ** | **1,163,991**                               |           | 240,863 |   |
| ** **                                                     |       |                                        |           |   |   |
| **Other Expenses**                                             |       |                                        |           |   |   |
| Salaries  and employee benefits                                | ** ** | **5,929,342**                               |           | 5,715,821 |   |
| Occupancy  and equipment                                       | ** ** | **1,800,582**                               |           | 1,967,589 |   |
| FDIC  deposit insurance premiums                               | ** ** | **756,151**                                 |           | 193,416 |   |
| Advertising  and marketing                                     | ** ** | **307,860**                                 |           | 466,181 |   |
| Professional  fees                                             | ** ** | **501,236**                                 |           | 438,407 |   |
| Loan  and OREO expense                                         | ** ** | **116,121**                                 |           | 38,256 |   |
| Directors  fees                                                | ** ** | **254,800**                                 |           | 249,560 |   |
| Provision  for loss on OREO                                    | ** ** | **106,753**                                 |           | — |   |
| Other  noninterest expense                                     | ** ** | **1,126,793**                               |           | 1,233,803 |   |
| Total  other expenses                                          | ** ** | **10,899,638**                              |           | 10,303,033 |   |
| ** **                                                     | ** ** | ** **                                  |           |   |   |
| **Income Before Income Tax Benefit**                           | ** ** | **1,317,697**                               |           | 194,034 |   |
| ** **                                                     | ** ** | ** **                                  |           |   |   |
| **Income Tax Benefit**                                         | ** ** | **(41,000**                                 | **)**          | (410,600 | ) |
| ** **                                                     | ** ** | ** **                                  |           |   |   |
| **Net Income**                                                 | ** ** | **$**                                       | **1,358,697**  |   | $ | 604,634 |   |
| ** **                                                     | ** ** | ** **                                  |           |   |   |
| **Basic Earnings per Share**                                   | ** ** | **$**                                       | **0.20**       |   | $ | 0.09 |   |

 

*See notes to consolidated financial statements.*

 

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**Alliance Bancorp, Inc. of Pennsylvania andSubsidiaries**

**ConsolidatedStatements of Changes in Stockholders’ Equity**

***Years Ended December 31,2009 and 2008***

 
| ** **                                                                         | ** ** | **Common Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Treasury  Stock** | ** ** | **Partially  Restricted  Retained  Earnings** | ** **     | **Unearned  shares held  by ESOP** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total  Stockholders’  Equity** | ** **   | **Comprehensive  Income** | ** **    |
|------------------------------------------------------------------------------------|------------|------------------|------------|----------------------------------|------------|---------------------|------------|-----------------------------------------------|----------------|------------------------------------|------------|---------------------------------------------|------------|---------------------------------------|--------------|---------------------------|---------------|
| Balance,  January 1, 2008                                                     |       | $                | 72,250     |                             | $          | 24,041,025          |       | $                                             | —         |                               | $          | 28,974,883                                  |       | $                                     | (843,108     | )                         | $             | (786,766 | ) | $ | 51,458,284 |   |   |   |
|                                                                               |       |             |       |                             |       |                |       |                                          |           |                               |       |                                        |       |                                  |         |                      |          |
| ESOP  shares committed to be released                                              |       |             |       | (11,900                          | )          |                |       |                                          |           | 120,444                            |       |                                        |       | 108,544                               |         |                      |          |
| Net  income                                                                        |       |             |       |                             |       |                |       | 604,634                                       |           |                               |       |                                        |       | 604,634                               |         | $                         | 604,634       |   |
| Dividends  declared ($0.24 per share)                                              |       |             |       |                             |       |                |       | (743,167                                      | )              |                               |       |                                        |       | (743,167                              | )            |                      |          |
| Acquisition  of treasury stock (267,324 shares)                                    |       |             |       |                             |       | (2,385,979          | )          |                                          |           |                               |       |                                        |       | (2,385,979                            | )            |                      |          |
| Change  in liability for retirement plans, net of tax                              |       |             |       |                             |       |                |       |                                          |           |                               |       | (655,018                                    | )          | (655,018                              | )            | (655,018                  | )             |
| Change  in net unrealized gain on securities available for sale-net of tax (1)     |       |             |       |                             |       |                |       |                                          |           |                               |       | 511,740                                     |       | 511,740                               |         | 511,740                   |          |
|                                                                               |       |             |       |                             |       |                |       |                                          |           |                               |       |                                        |       |                                  |         |                      |          |
| Balance,  December 31, 2008                                                   |       | 72,250           |       | 24,029,125                       |       | (2,385,979          | )          | 28,836,350                                    |           | (722,664                           | )          | (930,044                                    | )          | 48,899,038                            |         | $                         | 461,356       |   |
|                                                                               |       |             |       |                             |       |                |       |                                          |           |                               |       |                                        |       |                                  |         |                      |          |
| **ESOP shares committed to be released**                                           | ** ** | ** **       | ** ** | **(14,000**                      | **)**      | ** **          | ** ** | ** **                                    | ** **     | **120,435**                        | ** ** | ** **                                  | ** ** | **106,435**                           | ** **   | ** **                | ** **    |
| **Net income**                                                                     | ** ** | ** **       | ** ** | ** **                       | ** ** | ** **          | ** ** | **1,358,697**                                 | ** **     | ** **                         | ** ** | ** **                                  | ** ** | **1,358,697**                         | ** **   | **$**                     | **1,358,697** | ** ** |
| **Dividends declared ($0.12 per share)**                                           | ** ** | ** **       | ** ** | ** **                       | ** ** | ** **          | ** ** | **(347,736**                                  | **)**          | ** **                         | ** ** | ** **                                  | ** ** | **(347,736**                          | **)**        | ** **                | ** **    |
| **Acquisition of treasury stock (228,000 shares)**                                 | ** ** | ** **       | ** ** | ** **                       | ** ** | **(1,919,112**      | **)**      | ** **                                    | ** **     | ** **                         | ** ** | ** **                                  | ** ** | **(1,919,112**                        | **)**        | ** **                | ** **    |
| **Change in liability for retirement plans, net of  tax**                          | ** ** | ** **       | ** ** | ** **                       | ** ** | ** **          | ** ** | ** **                                    | ** **     | ** **                         | ** ** | **453,667**                                 | ** ** | **453,667**                           | ** **   | **453,667**               | ** **    |
| **Change in net unrealized gain on securities  available for sale-net of tax (1)** | ** ** | ** **       | ** ** | ** **                       | ** ** | ** **          | ** ** | ** **                                    | ** **     | ** **                         | ** ** | **(106,366**                                | **)**      | **(106,366**                          | **)**        | **(106,366**              | **)**         |
| ** **                                                                         | ** ** | ** **       | ** ** | ** **                       | ** ** | ** **          | ** ** | ** **                                    | ** **     | ** **                         | ** ** | ** **                                  | ** ** | ** **                            | ** **   | ** **                | ** **    |
| **Balance, December 31, 2009**                                                | ** ** | **$**            | **72,250** | ** **                       | **$**      | **24,015,125**      | ** ** | **$**                                         | **(4,305,091** | **)**                              | **$**      | **29,847,311**                              | ** ** | **$**                                 | **(602,229** | **)**                     | **$**         | **(582,743** | **)** | **$** | **48,444,623** | ** ** | **$** | **1,705,998** | ** ** |

 

----

(1)  Disclosure ofreclassification, net of tax for years ended:

 
|   |                                                                                                                                    | ** ** | **2009**   |         | **2008** |   |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------|--------------|----------|--------|
|   | Net unrealized losses arising during the year                                                                                           | ** ** | **$**      | **(106,366** | **)**    | $      | (174,363 | ) |
|   | Add: reclassification adjustment for  impairment charge included in net income (net of tax benefit of $-0- and  $299,949, respectively) | ** ** | **—** |         | 582,253  |   |
|   | Add: reclassification adjustment for net  losses included in net income (net of tax benefit of $-0- and $53,499,  respectively)         | ** ** | **—** |         | 103,850  |   |
|   |                                                                                                                                    | ** ** | ** ** |         |     |   |
|   | Change in net unrealized gains (losses) on  securities available for sale                                                               | ** ** | **$**      | **(106,366** | **)**    | $      | 511,740 |   |

 

*See notesto consolidated financial statements*.

 

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

**ConsolidatedStatements of Cash Flows**

 
| ** **                                                                               | ** ** | **Years Ended December 31,** | ** **     |
|------------------------------------------------------------------------------------------|------------|---------------------------------------------|----------------|
| ** **                                                                               | ** ** | **2009**                                    | ** **     | **2008** | ** ** |
| **Operating Activities**                                                                 |       |                                        |           |   |   |
| Net  income                                                                              | ** ** | **$**                                       | **1,358,697**  |   | $ | 604,634 |   |
| Adjustments to  reconcile net income to cash (used in) provided by operating activities: |       |                                        |           |   |   |
| Provision  for:                                                                          |       |                                        |           |   |   |
| Loan  losses                                                                             | ** ** | **528,215**                                 |           | 585,000 |   |
| Depreciation  and amortization                                                           | ** ** | **511,861**                                 |           | 686,083 |   |
| OREO                                                                                     | ** ** | **106,753**                                 | ** **     | **—** | ** ** |
| Gain  on sale of loans                                                                   |       | —                                      |           | (6,524 | ) |
| Impairment  charge on investment securities                                              |       | —                                      |           | 882,202 |   |
| Loss  on sale of investment securities                                                   |       | —                                      |           | 157,349 |   |
| ESOP  shares committed to be released                                                    | ** ** | **106,435**                                 |           | 108,544 |   |
| Loss  on sale of OREO                                                                    | ** ** | **14,877**                                  |           | — |   |
| Origination  of loans held for sale                                                      |       | —                                      |           | (1,328,000 | ) |
| Deferred  tax benefit                                                                    | ** ** | **(397,000**                                | **)**          | (665,676 | ) |
| Proceeds  from loans sold in the secondary market                                        |       | —                                      |           | 1,334,524 |   |
| Changes  in assets and liabilities which provided (used) cash:                           |       |                                        |           |   |   |
| Accrued  expenses and other liabilities                                                  | ** ** | **(196,379**                                | **)**          | 140,491 |   |
| Prepaid  expenses and other assets                                                       | ** ** | **(1,882,120**                              | **)**          | (227,063 | ) |
| Increase  in cash surrender value of bank owned life insurance                           | ** ** | **(355,243**                                | **)**          | (366,920 | ) |
| Accrued  interest receivable                                                             | ** ** | **(17,387**                                 | **)**          | (96,088 | ) |
| Net  cash (used in) provided by operating activities                                     | ** ** | **(221,291**                                | **)**          | 1,808,556 |   |
| ** **                                                                               |       |                                        |           |   |   |
| **Investing Activities**                                                                 |       |                                        |           |   |   |
| Purchase  of investment securities-available for sale                                    | ** ** | **(31,000,000**                             | **)**          | (29,500,000 | ) |
| Purchase  of investment securities-held to maturity                                      | ** ** | **(4,085,000**                              | **)**          | (4,000,000 | ) |
| Purchase  of mortgage-backed securities                                                  |       | —                                      |           | (4,340,000 | ) |
| Loans  originated and acquired                                                           | ** ** | **(65,627,266**                             | **)**          | (73,732,689 | ) |
| Proceeds  from maturities and calls of investment securities                             | ** ** | **44,347,929**                              |           | 20,675,000 |   |
| Proceeds  from the sale of investment securities available for sale                      |       | —                                      |           | 18,145,482 |   |
| Proceeds  from loans sold                                                                | ** ** | **500,000**                                 |           | — |   |
| Purchase  of FHLB stock                                                                  |       | —                                      |           | (128,700 | ) |
| Principal  repayments of:                                                                |       |                                        |           |   |   |
| Loans                                                                                    | ** ** | **54,264,173**                              |           | 51,643,300 |   |
| Mortgage-backed  securities                                                              | ** ** | **8,875,977**                               |           | 8,257,558 |   |
| Purchase  of premises and equipment                                                      | ** ** | **(278,058**                                | **)**          | (540,314 | ) |
| Investment  in OREO                                                                      | ** ** | **(33,734**                                 | **)**          | **—** | ** ** |
| Proceeds  from sale of OREO                                                              | ** ** | **707,819**                                 |           | — |   |
| Net  cash provided by (used in) investing activities                                     | ** ** | **7,671,840**                               |           | (13,520,363 | ) |
| ** **                                                                               |       |                                        |           |   |   |
| **Financing Activities**                                                                 |       |                                        |           |   |   |
| Dividends  paid                                                                          | ** ** | **(347,736**                                | **)**          | (743,167 | ) |
| Increase  in deposits                                                                    | ** ** | **46,622,021**                              |           | 913,748 |   |
| Purchase  of treasury stock                                                              | ** ** | **(1,919,112**                              | **)**          | (2,385,979 | ) |
| (Decrease)  increase in demand notes issued to the U.S. Treasury                         |       | (**177,275**                                | **)**          | 155,661 |   |
| Repayments  of FHLB advances                                                             | ** ** | **(5,000,000**                              | **)**          | — |   |
| Net  cash provided by (used in) financing activities                                     | ** ** | **39,177,898**                              |           | (2,059,737 | ) |
| ** **                                                                               | ** ** | ** **                                  |           |   |   |
| **Increase (decrease) in Cash and Cash Equivalents**                                     | ** ** | **46,628,447**                              |           | (13,771,544 | ) |
| **Cash and Cash Equivalents, Beginning of Year**                                         | ** ** | **28,307,656**                              |           | 42,079,200 |   |
| **Cash and Cash Equivalents**, **End of Year**                                           | ** ** | **$**                                       | **74,936,103** |   | $ | 28,307,656 |   |
| ** **                                                                               |       |                                        |           |   |   |
| **Supplemental Disclosures of Cash Flow  Information-**                                  |       |                                        |           |   |   |
| Cash  paid during the period for:                                                        |       |                                        |           |   |   |
| Interest                                                                                 | ** ** | **$**                                       | **9,537,066**  |   | $ | 11,752,387 |   |
| Income  taxes                                                                            | ** ** | **$**                                       | **300,000**    |   | $ | 400,000 |   |
| ** **                                                                               |       |                                        |           |   |   |
| **Supplemental Disclosure of Noncash Investing  Activity-**                              |       |                                        |           |   |   |
| Other  real estate acquired in settlement of loans                                       | ** ** | **$**                                       | **3,763,854**  |   | $ | — |   |

 

*See notesto consolidated financial statements*.

 

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

**Notes toConsolidated Financial Statements**

 

**1.    Organizational Structure and Nature ofOperations**

 

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

 

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

 

On June 5, 2006, the Bank announced its decision to form amid-tier stock holding company and to offer and sell additional shares. TheBoards of Directors of the Bank and the Holding Company adopted an Agreementand Plan of Reorganization (“Reorganization Plan”) and a Plan of AdditionalStock Issuance (“Stock Plan”) pursuant to which (i) a mid-tier stockholding company, Alliance Bancorp, Inc, of Pennsylvania (“Alliance Bancorp” orthe “Company”) was formed; (ii) the issued and outstanding shares ofcommon stock of the Bank were exchanged for shares of common stock of AllianceBancorp; and (iii) additional shares of Alliance Bancorp were offered andsold to certain depositors of the Bank and others in accordance with the StockPlan, and applicable federal banking regulation. As part of the ReorganizationPlan, the Holding Company converted to a federal charter and changed its nameto Alliance Mutual Holding Company.

 

Alliance Bancorp filed a registration statement with the Securities andExchange Commission with respect to the stock offering. Proxy and offeringmaterials setting forth detailed information relating to the ReorganizationPlan and Stock Plan were sent to shareholders of the Bank for theirconsideration and approval. Shareholders of the Bank approved theReorganization Plan at a special meeting of shareholders held on December 15,2006.  The reorganization and stockoffering were completed on January 30, 2007.  In the offering,Alliance Bancorp sold 1,807,339 shares of common stock at a purchase price of$10.00 per share and realized $16.5 million in net offering proceeds.  In addition, Alliance Bancorp issued5,417,661 shares of common stock in exchange for former outstanding shares ofthe Bank.  Each share of the Bank’scommon stock was converted into 2.09945 of common stock shares of AllianceBancorp.  Lastly, an Employee StockOwnership Program (ESOP) was established and the Bank borrowed $903,330 fromAlliance Bancorp to purchase 90,333 shares of common stock.  Principal and interest payments of the loanare made quarterly over a term of 8 years at an interest rate of 8.25%.

 

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

 

**SubsequentEvent** — TheCompany assessed events occurring subsequent to December 31, 2009 forpotential recognition and disclosure in the consolidated financial statements.Based upon subsequent information, the Company intends to increase itsprovision for loan losses in the quarter ending March 31, 2010 byapproximately $350,000 to $500,000 above its normal provision for loan losses,although no assurance can be given that the actual amount of such provisionwill not be higher.  Contributing to suchincrease, the Company intends to classify a $6.2 million land and developmentloan for a mixed use commercial real estate project located in Bradenton,Florida as non-accrual as of March 31, 2010.  This resulted from a lack of sales activitycombined with a decline in the liquidity of the borrowers and their inabilityto access additional funds.  In addition,the Company anticipates that additional reserves will be required upon thecompletion of its impairment analysis with respect to a $3.7 million realestate construction loan on 16 remaining substantially completed units locatedin center city Philadelphia that has been on non-accrual status since March 2009.  No other events have occurred that wouldrequire adjustment to or disclosure in the consolidated financial statements.

 

**2.    Summary of Significant Accounting Policies**

 

**Basis ofPresentation and Consolidation** - The consolidated financial statements of theCompany include the accounts of the Bank, Alliance Delaware Corporation, whichholds and manages certain investment and mortgage-backed securities, andAlliance Financial and Investment Services LLC, which participates incommission fees from non-insured alternative investment products, all arewholly owned subsidiaries of the Bank. All significant 

 

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intercompanybalances and transactions have been eliminated in consolidation.

 

**Use ofEstimates in the Preparation of Financial Statements***-* The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities.  Italso requires the disclosure of contingent assets and liabilities as of thedate of the financial statements and the reported amounts of income andexpenses during the reporting period. Actual results could differ from thoseestimates. Material estimates that are particularly susceptible to significantchange in the near term relate to the determination of the allowance for loanlosses, the potential impairment of FHLB stock, the valuation of deferred taxassets, liability and expense of employee benefit obligations, and evaluationof investment securities for other than temporary impairment.

 

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

 

The Companyoperates only in the U.S. domestic market, primarily in Pennsylvania’s Delawareand Chester Counties.  For the yearsended December 31, 2009 and 2008, there was no one customer that accountedfor more than 10% of the Bank’s revenue.

 

**Cash andCash Equivalents** —For purposes of reporting cash flows, cash and cash equivalents include cashand amounts due from depository institutions and interest-bearing deposits withdepository institutions.  As of December 31,2009 and 2008, the Bank’s minimum reserve balance with the Federal Reserve Bankwas approximately $2.0 million, and $2.3 million, respectively.

 

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

 

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

 

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

 

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

 

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

 
| ** **                              | ** ** | **December 31, 2009**        | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                              | ** ** | **Less than 12 Months** | ** ** | **12 Months or Longer** | ** ** | **Total** | ** ** |
| ** **                              | ** ** | **Fair  Value**                        | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| ** **                              | ** ** | **(In Thousands)**                | ** ** |
| **Securities Available for Sale**       | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **U.S. Government obligations**         | ** ** | **$**                                  | **19,784** | ** ** | **$** | **215** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **19,784** | ** ** | **$** | **215** | ** ** |
| **Mortgage-backed securities**          | ** ** | **—**                             | ** ** | **—** | ** ** | **669** | ** ** | **15** | ** ** | **699** | ** ** | **15** | ** ** |
| ** **                              | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total securities available for sale** | ** ** | **$**                                  | **19,784** | ** ** | **$** | **215** | ** ** | **$** | **699** | ** ** | **$** | **15** | ** ** | **$** | **20,483** | ** ** | **$** | **230** | ** ** |
| ** **                              | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Securities Held to Maturity**         | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Municipal obligations**               | ** ** | **$**                                  | **2,060**  | ** ** | **$** | **20** | ** ** | **$** | **3,904** | ** ** | **$** | **141** | ** ** | **$** | **5,964** | ** ** | **$** | **161** | ** ** |

 
| ** **                           | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------|------------|----------------------------|------------|
| ** **                           | ** ** | **Less than 12 Months**    | ** ** | **12 Months or Longer** | ** ** | **Total** | ** ** |
| ** **                           | ** ** | **Fair  Value**            | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| ** **                           | ** ** | **(In Thousands)**         | ** ** |
| Securities  Available for Sale       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| U.S.  Government obligations         |       | $                          | 1,987      |   | $ | 13 |   | $ | — |   | $ | — |   | $ | 1,987 |   | $ | 13 |   |
| Mortgage-backed  securities          |       | 2,594                      |       | 70 |   | 4,407 |   | 86 |   | 7,001 |   | 156 |   |
| Total  securities available for sale |       | $                          | 4,581      |   | $ | 83 |   | $ | 4,407 |   | $ | 86 |   | $ | 8,988 |   | $ | 169 |   |
|                                 |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Securities  Held to Maturity         |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Municipal  obligations               |       | $                          | 9,192      |   | $ | 443 |   | $ | 1,559 |   | $ | 162 |   | $ | 10,751 |   | $ | 605 |   |

 

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether or not the Bank intends to sell or expects that it is more likely than not that it will be required to sell the security prior to an anticipated recovery in fair value.  Once a decline in value for a debt security is determined to be other0than-temporary, the other-than-temporary impairment is separated into (a) the amount of total other-than-temporary impairment related to a decrease in cash flows expected to be collected from debt security (the credit loss) and (b) the amount of other-than-temporary impairment related to all other factors.  The amount of the total other-than-temporary impairment related to credit loss is recognized in earnings.  The amount of other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss).

 

As of December 31, 2009, management believes that the estimated fair value of the securities disclosed above is primarily dependent upon the movement in market interest rates particularly given the negligible inherent credit risk associated with these securities. These investment securities are comprised of securities that are rated investment grade by at least one bond credit rating service. Although the fair value will fluctuate as the market interest rates move, management believes that these fair values will recover as the underlying portfolios mature and are reinvested in market rate yielding investments. As of December 31, 2009, there were 17 U.S. government obligations, 5 mortgage-backed securities, and 8 municipal obligations, which were in an unrealized loss position.  Of the securities in an unrealized loss position at December 31, 2009, there were no U.S. government obligations, 5 

 

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mortgage-backed securities, and 5 municipal obligations, which were in an unrealized loss position for twelve months or longer.   The Company does not intend to sell and it is not more than likely than not that the Company will be required to sell these securities until such time as the value recovers or the securities mature. Management does not believe any individual unrealized loss as of December 31, 2009 represents an other-than-temporary impairment.

 

During 2008, due to a decline in the fair value of the Company’sinvestment in an $18.0 million mutual fund portfolio, the Company identifiedthe impairment of these securities as other than temporary and recorded a lossof $882,000 as a charge against operating results.  In April and July of 2008, theCompany sold approximately $15.5 million and $254,000, respectively, of themutual funds and recorded pretax losses on the sale of securities of $153,000and $4,000, respectively.  In August of2008, the remaining $2.7 million of mutual funds were sold at fair value toAlliance Mutual Holding Company.

 

**FederalHome Loan Bank Stock**-Federal Home Loan Bank (“FHLB”) Stock, which represents the required investmentin the common stock of a correspondent bank, is carried at cost. In December 2008,the FHLB of Pittsburgh notified member banks that it was suspending dividendpayments and the repurchase of capital stock.

 

Management’sdetermination of whether this investment is impaired is based on theirassessment of the ultimate recoverability of its cost rather than byrecognizing temporary declines in value. The determination of whether a decline affects the ultimaterecoverability of its cost is influenced by criteria such as (1) thesignificance of the decline in net assets of the FHLB as compared to thecapital stock amount for the FHLB and the length of time this situation haspersisted, (2) commitments by the FHLB to make payments required by law orregulation and the level of such payments in relation to the operatingperformance of the FHLB, and (3) the impact of legislative and regulatorychanges on institutions and, accordingly, on the customer base of the FHLB.

 

Managementbelieves no impairment charge is necessary related to the FHLB stock as of December 31,2009.

 

**Loans** - The Bank grants mortgage, commercialand consumer loans to customers. A substantial portion of the loan portfolio isrepresented by mortgage loans in southeastern Pennsylvania. The ability of theBank’s debtors to honor their contract is dependent upon real estate andgeneral economic conditions. Loans originated and intended for sale in thesecondary market are carried at the lower of cost or estimated fair value inaggregate. Net unrealized losses, if any, are recognized through a valuationallowance by charges to income. The Bank defers all loan fee income, net ofcertain direct loan origination costs. The balance is accreted into income as ayield adjustment over the life of the loan using the interest method.

 

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

 

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

 

Impaired loans arepredominantly measured based on the fair value of the collateral. The provisionfor loan losses charged to expense is based upon past loan loss experience andan evaluation of probable losses and impairment existing in the current loanportfolio.  A loan is considered to beimpaired when, based upon current information and events, it is probable thatthe Bank will be unable to collect all amounts due according to the originalcontractual terms of the loan.  Aninsignificant delay or insignificant shortfall in amounts of payments does notnecessarily result in the loan being identified as impaired.  For this purpose, delays less than 90 daysare considered to be insignificant. Large groups of smaller balance homogeneous loans, including residentialreal estate and consumer loans, are collectively evaluated for impairment,except for loans restructured under a troubled debt restructuring.

 

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

 

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**Purchase Discounts and Premiums** — Purchase discounts and premiums on loans and investment and mortgage-backed securities purchased are amortized over the expected average life of the loans and securities using the interest method.

 

**OtherReal Estate Owned**- Other real estate acquired through, or in lieu of, foreclosure is initiallyrecorded at fair value at the date of acquisition, establishing a new costbasis through a charge to the allowance for loan losses, if necessary.  Revenues and expenses from operations areincluded in other income and other expense. Additions to the valuation allowance are included in other expense.  Subsequent to foreclosure, valuations areperiodically performed by management and an allowance for losses isestablished, if necessary, by a charge to operations if the carrying value of aproperty exceeds its estimated fair value less estimated costs to sell.

 

**Bank-OwnedLife Insurance -**TheBank is the beneficiary of insurance policies on the lives of certain officersof the Bank. The Bank has recognized the amount that could be realized underthe insurance policies as an asset in the consolidated statements of financialcondition.

 

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

 

**IncomeTaxes** - The Bankaccounts for Income Taxes in accordance with the guidance set forth in FASB ASCTopic 740, Income Taxes.  The income taxaccounting guidance results in two components of income tax expense: currentand deferred. Current income tax expense reflects taxes to be paid or refundedfor the current period by applying the provisions of the enacted tax law to thetaxable income or excess of deductions over revenues. The Bank determinesdeferred income taxes using the liability (or balance sheet) method. Under thismethod, the net deferred tax asset or liability is based on the tax effects ofthe differences between the book and tax bases of assets and liabilities, andenacted changes in tax rates and laws are recognized in the period in whichthey occur. Deferred income tax expense results from changes in deferred taxassets and liabilities between periods. Deferred tax assets are recognized ifit is more likely than not, based on the technical merits, that the taxposition will be realized or sustained upon examination. The term more likelythan not means a likelihood of more than 50 percent; the terms examined andupon examination also include resolution of the related appeals or litigationprocesses, if any. A tax position that meets the more-likely-than-notrecognition threshold is initially and subsequently measured as the largestamount of tax benefit that has a greater than 50 percent likelihood of beingrealized upon settlement with a taxing authority that has full knowledge of allrelevant information. The determination of whether or not a tax position hasmet the more-likely-than-not recognition threshold considers the facts,circumstances, and information available at the reporting date and is subjectto management’s judgment. Deferred tax assets are reduced by a valuationallowance if, based on the weight of evidence available, it is more likely thannot that some portion or all of a deferred tax asset will not be realized.

 

The Bankrecognizes interest and penalties on income taxes as a component of income taxexpense.  The Company’s federal incomeand state tax returns for taxable years through December 31, 2006 havebeen closed for purposes of examination by the Internal Revenue Service andPennsylvania Department of Revenue.

 

The Bank has also enteredinto a tax sharing agreement (under the Internal Revenue Section 1552)with the Company and Alliance Delaware Corporation.  The agreement provides that the tax liabilityshall be apportioned among the members of the group in accordance with the ratiowhich that portion of the consolidated taxable income attributed to each memberof the group having taxable income bears to the consolidated taxableincome.  The Bank had $-0- and $3,600 dueto the Company at December 31, 2009 and 2008, respectively.

 

**Transfersof Financial Assets-**Transfers of financial assets are accounted for as sales, when controlover the assets has been surrendered. Control over transferred assets is deemedto be surrendered when (1) the assets have been isolated from the Bank, (2) thetransferee obtains the right (free of conditions that constrain it from takingadvantage of that right) to pledge or exchange the transferred assets, and (3) theBank does not maintain effective control over the transferred assets through anagreement to repurchase them before their maturity.

 

**EmployeeBenefit Plans**-The Bank’s 401(k) plan allows eligible participants to set aside a certainpercentage of their salaries before taxes. The Bank may elect to match employeecontributions, as a profit sharing payment, up to a specified percentage oftheir respective salaries in an amount determined annually by the Board ofDirectors. The Company’s profit sharing contribution related to the planresulted in expenses of $110,000 and $100,000 for 2009, 

 

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and 2008,respectively.

 

The Bank alsomaintains a Supplemental Executive Plan and a Retirement Income Plan (the “Plans”).The accrued amount for the Plans included in other liabilities was $3.5 millionand $3.4 million at December 31, 2009 and 2008, respectively. The expenseassociated with the Plans for the years ended December 31, 2009, and 2008was $290,000, and $521,000, respectively.

 

**Advertising Costs**- The Bank follows the policy of charging the costs ofadvertising to expense as incurred. Advertising costs were $308,000 and $466,000 for the years ended December 31,2009 and December 31, 2008, respectively.

 

**Earningsper Share** - Thereare no convertible securities which would affect the net income (numerator) incalculating earnings per share.  Basicearnings per share data are based on the weighted-average number of sharesoutstanding during each period.  At thepresent time, the Bank’s capital structure has no potential dilutivesecurities.

 

The followingtable sets forth the composition of the weighted average shares (denominator)used in the basic earnings per share computation.

 
| ** **                                        | ** ** | **For the Years**           | ** **    |
|---------------------------------------------------|------------|-----------------------------|---------------|
| ** **                                        | ** ** | **Ended December 31,** | ** **    |
| ** **                                        | ** ** | **2009**                    | ** **    | **2008** | ** ** |
|                                              |       |                        |          |   |   |
| Net  Income                                       | ** ** | **$**                       | **1,358,697** |   | $ | 604,634 |   |
|                                              | ** ** | ** **                  |          |   |   |
| Weighted  average shares outstanding              | ** ** | **6,854,361**               |          | 7,045,768 |   |
| Average  unearned ESOP shares                     | ** ** | **(65,980**                 | **)**         | (78,289 | ) |
| Weighted  average shares outstanding — basic | ** ** | **6,788,381**               |          | 6,967,479 |   |
|                                              | ** ** | ** **                  |          |   |   |
| Basic  earnings per share                         | ** ** | **$**                       | **0.20**      |   | $ | 0.09 |   |

 

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

 

The components ofaccumulated other comprehensive loss are as follows:

 
| ** **                                  | ** ** | **December 31,** | ** **   | **December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------|--------------|-----------------------|------------|
| ** **                                  | ** ** | **2009**              | ** **   | **2008**              | ** ** |
|                                        | ** ** | ** **            |         |                  |       |
| Net  unrealized gain (loss) on securities   | ** ** | **$**                 | **519,070**  |                  | $          | 625,436 |   |
| Net  unrealized loss on retirement plans    | ** ** | **(1,101,813**        | **)**        | (1,555,480            | )          |
| Total  accumulated other comprehensive loss | ** ** | **$**                 | **(582,743** | **)**                 | $          | (930,044 | ) |

 

**DividendRestriction**-TheHolding Company held 3,973,750 shares, or 59.0%, of the Company’s outstandingcommon stock, and the minority public shareholders held 41.0% of outstandingstock at December 31, 2009. The Holding Company has filed a notice withthe Office of Thrift Supervision (“OTS”) to waive its right to receive cashdividends during the 2010 calendar year. The Company paid a fourth quarter cashdividend on November 20, 2009 to all minority public shareholders.

 

The HoldingCompany has waived receipt of past dividends paid by the Company. The dividendswaived are considered as a restriction on the retained earnings of the Company.As of December 31, 2009 and December 31, 2008, the aggregate retained earningsrestricted for cash dividends waived were $2,185,563 and $1,708,713,respectively.

 

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**Recent Accounting Pronouncements —**

 

ASU 2009-12, “FairValue Measurements and Disclosures (Topic 820) - Investments in CertainEntities That Calculate Net Asset Value per Share (or Its Equivalent),” issuedin September, 2009, allows a company to measure the fair value of an investmentthat has no readily determinable fair market value on the basis of the investee’snet asset value per share as provided by the investee. This allowance assumesthat the investee has calculated net asset value in accordance with the GAAPmeasurement principles of Topic 946 as of the reporting entity’s measurementdate.   Examples of such investments include investments in hedgefunds, private equity funds, real estate funds and venture capital funds. Theupdate also provides guidance on how the investment should be classified withinthe fair value hierarchy based on the value for which the investment can beredeemed.  The amendment is effective for interim and annual periods endingafter December 15, 2009 with early adoption permitted.  The Companydoes not have investments in such entities and, therefore, there will be noimpact to our financial statements.

 

Issued October,2009, ASU 2009-15, “Accounting for Own-Share Lending Arrangements inContemplation of Convertible Debt Issuance or Other Financing” amends ASC Topic470 and provides guidance for accounting and reporting for own-share lendingarrangements issued in contemplation of a convertible debt issuance.  Atthe date of issuance, a share-lending arrangement entered into on an entity’sown shares should be measured at fair value in accordance with Topic 820 andrecognized as an issuance cost, with an offset to additional paid-incapital.  Loaned shares are excluded from basic and diluted earnings pershare unless default of the share-lending arrangement occurs.  Theamendments also require several disclosures including a description and theterms of the arrangement and the reason for entering into the arrangement. The effective dates of the amendments are dependent upon the date theshare-lending arrangement was entered into and include retrospectiveapplication for arrangements outstanding as of the beginning of fiscal yearsbeginning on or after December 15, 2009.   The Company has noplans to issue convertible debt and, therefore, does not expect the update tohave an impact on its financial statements.

 

In October 2009,the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860) - Accountingfor Transfers of Financial Assets.  ThisUpdate amends the Codification for the issuance of FASB Statement No. 166,Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140.  The amendments in this Update improvefinancial reporting by eliminating the exceptions for qualifyingspecial-purpose entities from the consolidation guidance and the exception thatpermitted sale accounting for certain mortgage securitizations when atransferor has not surrendered control over the transferred financial assets.In addition, the amendments require enhanced disclosures about the risks that atransferor continues to be exposed to because of its continuing involvement intransferred financial assets. Comparability and consistency in accounting for transferred financial assetswill also be improved through clarifications of the requirements for isolationand limitations on portions of financial assets that are eligible for saleaccounting.  This Update is effective atthe start of a reporting entity’s first fiscal year beginning after November 15,2009.  Early application is notpermitted.  The implementation of thisstandard is not expected to have an impact on the Company’s consolidatedfinancial position or results of operations.

 

In October 2009,the FASB issued ASU 2009-17, Consolidations (Topic 810) - Improvements toFinancial Reporting by Enterprises Involved with Variable InterestEntities.  This Update amends theCodification for the issuance of FASB Statement No. 167, Amendments toFASB Interpretation No. 46(R).  Theamendments in this Update replace the quantitative-based risks and rewardscalculation for determining which reporting entity, if any, has a controllingfinancial interest in a variable interest entity with an approach focused onidentifying which reporting entity has the power to direct the activities of avariable interest entity that most significantly impact the entity’s economicperformance and (1) the obligation to absorb losses of the entity or (2) theright to receive benefits from the entity. An approach that is expected to beprimarily qualitative will be more effective for identifying which reportingentity has a controlling financial interest in a variable interest entity.  The amendments in this Update also requireadditional disclosures about a reporting entity’s involvement in variableinterest entities, which will enhance the information provided to users offinancial statements.  This Update iseffective at the start of a reporting entity’s first fiscal year beginningafter November 15, 2009.  Earlyapplication is not permitted.  Theimplementation of this standard is not expected to have an impact on theCompany’s consolidated financial position or results of operations.

 

In January 2010,the FASB issued ASU 2010-01, Equity (Topic 505) - Accounting for Distributionsto Shareholders with Components of Stock and Cash.  The amendments in this Update clarify thatthe stock portion of a distribution to shareholders that allows them to electto receive cash or stock with a potential limitation on the total amount ofcash that all shareholders can elect to receive in the aggregate is considereda share issuance that is reflected in earnings per share prospectively and isnot a stock dividend.  This Update codifiesthe consensus reached in EITF Issue No. 09-E, “Accounting for StockDividends, Including Distributions to Shareholders with Components of Stock andCash.”   This Update is effective forinterim and annual periods ending on or after December 15, 2009, andshould be applied on a retrospective basis. The implementation of this standard is not expected to have an 

 

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impact on theCompany’s consolidated financial position or results of operations.

 

In January 2010,the FASB issued ASU 2010-02, Consolidation (Topic 810) - Accounting andReporting for Decreases in Ownership of a Subsidiary - A ScopeClarification.  This Update clarifiesthat the scope of the decrease in ownership provisions of Subtopic 810-10 andrelated guidance applies to: a subsidiary or group of assets that is a businessor nonprofit activity; a subsidiary that is a business or nonprofit activitythat is transferred to an equity method investee or joint venture; and anexchange of a group of assets that constitutes a business or nonprofit activityfor a noncontrolling interest in an entity (including an equity method investeeor joint venture). This Update also clarifies that the decrease in ownershipguidance in Subtopic 810-10 does not apply to: (a) sales of in substancereal estate; and (b) conveyances of oil and gas mineral rights, even ifthese transfers involve businesses.  Theamendments in this Update expand the disclosure requirements aboutdeconsolidation of a subsidiary or derecognition of a group of assets toinclude:  the valuation techniques usedto measure the fair value of any retained investment; the nature of anycontinuing involvement with the subsidiary or entity acquiring the group ofassets; and whether the transaction that resulted in the deconsolidation orderecognition was with a related party or whether the former subsidiary orentity acquiring the assets will become a related party after the transaction.  This Update is effective beginning in theperiod that an entity adopts FASB Statement No. 160, NoncontrollingInterests in Consolidated Financial Statements - an amendment of ARB 51 (nowincluded in Subtopic 810-10).  If anentity has previously adopted Statement 160, the amendments are effectivebeginning in the first interim or annual reporting period ending on or after December 15,2009.  The amendments in this Updateshould be applied retrospectively to the first period that an entity adoptsStatement 160.  The implementation ofthis standard is not expected to have an impact on the Company’s consolidatedfinancial position or results of operations.

 

The FASB hasissued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820):Improving Disclosures about Fair Value Measurements. This ASU requires some newdisclosures and clarifies some existing disclosure requirements about fairvalue measurement as set forth in Codification Subtopic 820-10. The FASB’sobjective is to improve these disclosures and, thus, increase the transparencyin financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic820-10 to now require:   a reportingentity to disclose separately the amounts of significant transfers in and outof Level 1 and Level 2 fair value measurements and describe the reasons for thetransfers; and in the reconciliation for fair value measurements usingsignificant unobservable inputs, a reporting entity should present separatelyinformation about purchases, sales, issuances, and settlements.  In addition, ASU 2010-06 clarifies therequirements of the following existing disclosures: for purposes of reportingfair value measurement for each class of assets and liabilities, a reportingentity needs to use judgment in determining the appropriate classes of assetsand liabilities; and a reporting entity should provide disclosures about thevaluation techniques and inputs used to measure fair value for both recurringand nonrecurring fair value measurements. ASU 2010-06 is effective for interim and annual reporting periodsbeginning after December 15, 2009, except for the disclosures aboutpurchases, sales, issuances, and settlements in the roll forward of activity inLevel 3 fair value measurements. Those disclosures are effective for fiscalyears beginning after December 15, 2010, and for interim periods withinthose fiscal years. Early adoption is permitted.  The Company is currently reviewing the effectthis new pronouncement will have on its consolidated financial statements.

 

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

 

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

 
| ** **                                  | ** ** | **December 31, 2009** | ** **    |
|---------------------------------------------|------------|---------------------------------|---------------|
| ** **                                  | ** ** | **Amortized**                   | ** **    | **Gross Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                  | ** ** | **Cost**                        | ** **    | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
|                                        |       |                            |          |   |   |   |   |   |   |
| Available  for Sale:                        |       |                            |          |   |   |   |   |   |   |
|                                        |       |                            |          |   |   |   |   |   |   |
| Obligations  of the Federal Home Loan Bank: |       |                            |          |   |   |   |   |   |   |
| Due  1 year or less                         | ** ** | **$**                           | **1,000,000** | ** ** | **$** | **4,690** | ** ** | **—** | ** ** | **$** | **1,004,690** | ** ** |
| Due  after 5 years through 10 years         | ** ** | **4,995,699**                   | ** **    | **100,251** | ** ** | **(16,870** | **)** | **5,079,080** | ** ** |
|                                        |       |                            |          |   |   |   |   |   |   |
| Total                                       | ** ** | **$**                           | **5,995,699** | ** ** | **$** | **104,941** | ** ** | **$** | **(16,870** | **)** | **$** | **6,083,770** | ** ** |
|                                             |            |                                 |               |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                        | ** ** | **December 31, 2009** | ** **    |
|-----------------------------------|------------|---------------------------------|---------------|
| ** **                        | ** ** | **Amortized**                   | ** **    | **Gross Unrealized** | ** ** | **Fair** | ** ** |
| ** **                        | ** ** | **Cost**                        | ** **    | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| ** **                        | ** ** | ** **                      | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Obligations  of Freddie Mac:      |       |                            |          |   |   |   |   |   |   |
| Due  after 1 year through 5 years | ** ** | **$**                           | **1,000,000** | ** ** | **$** | **—** | ** ** | **(15,310** | **)** | **$** | **984,690** | ** ** |
| Due  after 10 years               | ** ** | **1,000,000**                   | ** **    | **—** | ** ** | **(5,000** | **)** | **995,000** | ** ** |
|                              | ** ** | ** **                      | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total                             | ** ** | **$**                           | **2,000,000** | ** ** | **$** | **—** | ** ** | **$** | **(20,310** | **)** | **$** | **1,979,690** | ** ** |
|                                   |            |                                 |               |  |  |  |  |  |  |  |  |  |  |

 
| ** **                          | ** ** | **December 31, 2009** | ** **     |
|-------------------------------------|------------|---------------------------------|----------------|
| ** **                          | ** ** | **Amortized**                   | ** **     | **Gross Unrealized** | ** ** | **Fair** | ** ** |
| ** **                          | ** ** | **Cost**                        | ** **     | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| ** **                          | ** ** | ** **                      | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Obligations  of Fannie Mae:         |       |                            |           |   |   |   |   |   |   |
| Due  after 5 years through 10 years | ** ** | **$**                           | **6,000,000**  | ** ** | **$** | **2,190** | ** ** | **$** | **(41,250** | **)** | **$** | **5,960,940** | ** ** |
| Due  after 10 years                 | ** ** | **14,999,122**                  | ** **     | **2,820** | ** ** | **(136,492** | **)** | **14,865,450** | ** ** |
|                                |       |                            |           |   |   |   |   |   |   |
| Total                               | ** ** | **$**                           | **20,999,122** | ** ** | **$** | **5,010** | ** ** | **$** | **(177,742** | **)** | **$** | **20,826,390** | ** ** |

 
| ** **                          | ** ** | **December 31, 2009** | ** **     |
|-------------------------------------|------------|---------------------------------|----------------|
| ** **                          | ** ** | **Amortized**                   | ** **     | **Gross Unrealized** | ** ** | **Fair** | ** ** |
| ** **                          | ** ** | **Cost**                        | ** **     | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| ** **                          | ** ** | ** **                      | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Held  to Maturity                   |       |                            |           |   |   |   |   |   |   |
|                                |       |                            |           |   |   |   |   |   |   |
| Municipal  Obligations:             |       |                            |           |   |   |   |   |   |   |
| Due  after 5 years through 10 years | ** ** | **$**                           | **4,315,560**  | ** ** | **$** | **169,914** | ** ** | **—** | ** ** | **$** | **4,485,474** | ** ** |
| Due  after 10 years                 | ** ** | **19,130,243**                  | ** **     | **341,992** | ** ** | **$** | **(161,285** | **)** | **19,310,950** | ** ** |
|                                |       |                            |           |   |   |   |   |   |   |
| Total                               | ** ** | **$**                           | **23,445,803** | ** ** | **$** | **511,906** | ** ** | **$** | **(161,285** | **)** | **$** | **23,796,424** | ** ** |

 
| ** **                                  | ** ** | **December 31, 2008** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **Amortized**                   | ** ** | **Gross Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                  | ** ** | **Cost**                        | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| ** **                                  | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Available  for Sale:                        |       |                            |       |   |   |   |   |   |   |
|                                        |       |                            |       |   |   |   |   |   |   |
| Obligations  of the Federal Home Loan Bank: |       |                            |       |   |   |   |   |   |   |
| Due  after 1 year through 5 years           |       | $                               | 1,000,000  |   | $ | 22,190 |   | — |   | $ | 1,022,190 |   |
| Due  after 5 years through 10 years         |       | 3,995,054                       |       | 159,956 |   | — |   | 4,155,010 |   |
|                                        |       |                            |       |   |   |   |   |   |   |
| Total                                       |       | $                               | 4,995,054  |   | $ | 182,146 |   | $ | — |   | $ | 5,177,200 |   |
|                                             |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                          | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **Amortized**                   | ** ** | **Gross Unrealized** | ** ** | **Fair** | ** ** |
| ** **                          | ** ** | **Cost**                        | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| ** **                          | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Obligations  of Freddie Mac:        |       |                            |       |   |   |   |   |   |   |
| Due  after 5 years through 10 years |       | $                               | 10,993,236 |   | $ | 35,785 |   | $ | — |   | $ | 11,029,021 |   |
| Due  after 10 years                 |       | 7,493,482                       |       | 25,383 |   | (1,820 | ) | 7,517,045 |   |
|                                |       |                            |       |   |   |   |   |   |   |
| Total                               |       | $                               | 18,486,718 |   | $ | 61,168 |   | $ | (1,820 | ) | $ | 18,546,066 |   |

 

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| ** **                  | ** ** | **December 31, 2008** | ** ** |
|-----------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **Amortized**                   | ** ** | **Gross Unrealized** | ** ** | **Fair** | ** ** |
| ** **                  | ** ** | **Cost**                        | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| ** **                  | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Obligations  of Fannie Mae: |       |                            |       |   |   |   |   |   |   |
| Due  1 year or less         |       | $                               | 998,087    |   | $ | 33,793 |   | $ | — |   | $ | 1,031,880 |   |
| Due  after 10 years         |       | 9,967,932                       |       | 58,958 |   | — |   | 10,026,890 |   |
|                        |       |                            |       |   |   |   |   |   |   |
| Total                       |       | $                               | 10,966,019 |   | $ | 92,751 |   | $ | — |   | $ | 11,058,770 |   |

 
| ** **                           | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **Amortized**                   | ** ** | **Gross Unrealized** | ** ** | **Fair** | ** ** |
| ** **                           | ** ** | **Cost**                        | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| ** **                           | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Obligations  of Federal Farm Credit: |       |                            |       |   |   |   |   |   |   |
| Due  after 5 years through 10 years  |       | $                               | 3,000,000  |   | $ | 43,130 |   | $ | (10,940 | ) | $ | 3,032,190 |   |
|                                 |       |                            |       |   |   |   |   |   |   |
| Total                                |       | $                               | 3,000,000  |   | $ | 43,130 |   | $ | (10,940 | ) | $ | 3,032,190 |   |

 
| ** **                          | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **Amortized**                   | ** ** | **Gross Unrealized** | ** ** | **Fair** | ** ** |
| ** **                          | ** ** | **Cost**                        | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| ** **                          | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Held  to Maturity                   |       |                            |       |   |   |   |   |   |   |
|                                |       |                            |       |   |   |   |   |   |   |
| Municipal  Obligations:             |       |                            |       |   |   |   |   |   |   |
| Due  after 5 years through 10 years |       | $                               | 7,638,991  |   | $ | 100,336 |   | $ | (68,254 | ) | $ | 7,671,073 |   |
| Due  after 10 years                 |       | 16,616,771                      |       | 207,481 |   | (536,999 | ) | 16,287,253 |   |
|                                |       |                            |       |   |   |   |   |   |   |
| Total                               |       | $                               | 24,255,762 |   | $ | 307,817 |   | $ | (605,253 | ) | $ | 23,958,326 |   |

 

Included inobligations of U.S. Government agencies at December 31, 2009 and December 31,2008, were $19.8 million and $17.0 million, respectively, of structurednotes.   These structured notes werecomprised of step-up bonds that provide the U.S. Government agencies with theright, but not the obligation, to call the bonds on certain dates.

 

For the yearsended December 31, 2009 and 2008, proceeds from sales of investmentsecurities available for sale amounted to $-0- million and $18.1 million,respectively. For such periods, gross realized gains on sales amounted to $0and $-0-, respectively, while gross realized losses amounted to $-0- and$157,349, respectively. The tax expense (benefit) applicable to the netrealized gain (loss) amounted to $-0- and $(53,499), for 2009 and 2008,respectively. Investment securities with an aggregate carrying value of $12.0million and $4.0 million were pledged as collateral for certain deposits at December 31,2009 and 2008, respectively.

 

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

 

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

 
| ** **                       | ** ** | **December 31, 2009** | ** **     |
|----------------------------------|------------|---------------------------------|----------------|
| ** **                       | ** ** | **Amortized**                   | ** **     | **Gross Unrealized** | ** ** | **Fair** | ** ** |
| ** **                       | ** ** | **Cost**                        | ** **     | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| ** **                       | ** ** | ** **                      | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| GNMA  pass-through certificates  | ** ** | **$**                           | **2,141,689**  | ** ** | **$** | **79,369** | ** ** | **—** | ** ** | **$** | **2,221,058** | ** ** |
| FHLMC  pass-through certificates | ** ** | **8,379,078**                   | ** **     | **418,743** | ** ** | **—** | ** ** | **8,797,821** | ** ** |
| FNMA  pass-through certificates  | ** ** | **11,942,817**                  | ** **     | **408,396** | ** ** | **$** | **(15,067** | **)** | **12,336,146** | ** ** |
|                             |       |                            |           |   |   |   |   |   |   |
| Total                            | ** ** | **$**                           | **22,463,584** | ** ** | **$** | **906,508** | ** ** | **$** | **(15,067** | **)** | **$** | **23,355,025** | ** ** |

 
| ** **                       | ** ** | **December 31, 2008** | ** ** |
|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **Amortized**                   | ** ** | **Gross Unrealized** | ** ** | **Fair** | ** ** |
| ** **                       | ** ** | **Cost**                        | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
|                             |       |                            |       |   |   |   |   |   |   |
| GNMA  pass-through certificates  |       | $                               | 2,541,324  |   | $ | 30,113 |   | $ | (79,638 | ) | $ | 2,491,799 |   |
| FHLMC  pass-through certificates |       | 12,292,382                      |       | 352,651 |   | (3,968 | ) | 12,641,065 |   |
| FNMA  pass-through certificates  |       | 16,505,855                      |       | 354,950 |   | (72,912 | ) | 16,787,893 |   |
|                             |       |                            |       |   |   |   |   |   |   |
| Total                            |       | $                               | 31,339,561 |   | $ | 737,714 |   | $ | (156,518 | ) | $ | 31,920,757 |   |

 

At December 31,2009 and 2008, the Bank had $3.1 million and $5.6 million, respectively, inmortgage-backed securities pledged as collateral for the treasury, tax and loanaccount and certain deposits.  There wereno sales of mortgage-backed securities in 2009 or 2008.

 

**5.     Loans Receivable - Net**

 

Loans receivableconsist of the following:

 
| ** **                 | ** ** | **December 31,** | ** **      |
|----------------------------|------------|-----------------------|-----------------|
| ** **                 | ** ** | **2009**              | ** **      | **2008** | ** ** |
| Real  estate loans:        |       |                  |            |   |   |
| Single-family              | ** ** | **$**                 | **114,953,350** |   | $ | 116,682,502 |   |
| Multi-family               | ** ** | **1,231,148**         |            | 1,281,274 |   |
| Commercial                 | ** ** | **131,873,637**       |            | 123,465,061 |   |
| Land  and construction     | ** ** | **24,580,893**        |            | 25,260,812 |   |
| Commercial  business       | ** ** | **8,457,702**         |            | 8,985,325 |   |
| Consumer  and other loans  | ** ** | **7,613,968**         |            | 5,936,821 |   |
| Total  loans receivable    | ** ** | **288,710,698**       |            | 281,611,795 |   |
| Less:                      |       |                  |            |   |   |
| Deferred  fees             | ** ** | **(165,384**          | **)**           | (6,123 | ) |
| Allowance  for loan losses | ** ** | **(3,537,736**        | **)**           | (3,169,118 | ) |
| Loans  receivable - net    | ** ** | **$**                 | **285,007,578** | ** ** | **$** | 278,436,554 | ** ** |

 

The Bankoriginates loans to customers located primarily in Southeastern Pennsylvania.This geographic concentration of credit exposes the Bank to a higher degree ofrisk associated with this economic region. In addition, the Bank participatesin the origination and sale of fixed-rate single-family residential mortgageloans in the secondary market. The Bank recognized gains from the sale of suchloans of $-0- and $6,524, for the years ended 

 

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December 31,2009 and 2008, respectively.  Servicingwas released upon sale.

 

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

 
| ** **                       | ** ** | **Year Ended**   | ** **    |
|----------------------------------|------------|-----------------------|---------------|
| ** **                       | ** ** | **December 31,** | ** **    |
| ** **                       | ** ** | **2009**              | ** **    | **2008** | ** ** |
|                             |       |                  |          |   |   |
| Balance,  beginning of year      | ** ** | **$**                 | **3,169,118** |   | $ | 2,831,065 |   |
| Provision  charged to operations | ** ** | **528,215**           |          | 585,000 |   |
| Charge-offs                      | ** ** | **(160,661**          | **)**         | (365,823 | ) |
| Recoveries                       | ** ** | **1,064**             |          | 118,876 |   |
|                             |       |                  |          |   |   |
| Balance,  end of year            | ** ** | **$**                 | **3,537,736** |   | $ | 3,169,118 |   |

 

Non-performingloans amounted to $7.8 million and $7.0 million at December 31, 2009 and2008, respectively.  Interest income thatwould have been recorded during 2009 and 2008, if the Bank’s nonperformingloans at the end of the year had been performing in accordance with their termswas $335,000 and $347,000, respectively. The amount of interest income that was actually recorded during 2009 and2008 with respect to such nonperforming loans amounted to approximately$136,000 and $121,000, respectively. Loans 90 days past due and still accruing were $1.4 million and $1.8million at December 31, 2009 and December 31, 2008,respectively.  Non-accrual loans were$6.4 million and $5.2 million at December 31, 2009 and December 31,2008, respectively.  OREO was $3.0million and $-0- at December 31, 2009 and December 31, 2008,respectively.

 

At December 31,2009 and 2008, 100% of impaired loan balances were measured for impairmentbased on the fair value of the loans’ collateral.

 
| ** **                                     | ** ** | **December 31,** | ** **    |
|------------------------------------------------|------------|-----------------------|---------------|
| ** **                                     | ** ** | **2009**              | ** **    | **2008** | ** ** |
|                                           |       |                  |          |   |   |
| Impaired  loans without a valuation allowance  | ** ** | **$**                 | **1,543,035** |   | $ | 1,603,076 |   |
|                                           |       |                  |          |   |   |
| Impaired  loans with a valuation allowance     | ** ** | **$**                 | **4,435,158** |   | $ | 2,844,244 |   |
|                                           |       |                  |          |   |   |
| Total  impaired loans                          | ** ** | **$**                 | **5,978,193** |   | $ | 4,447,320 |   |
|                                           |       |                  |          |   |   |
| Valuation  allowance related to impaired loans | ** ** | **$**                 | **107,903**   |   | $ | 225,435 |   |

 
| ** **                                                    | ** ** | **Year Ended**   | ** **    |
|---------------------------------------------------------------|------------|-----------------------|---------------|
| ** **                                                    | ** ** | **December 31,** | ** **    |
| ** **                                                    | ** ** | **2009**              | ** **    | **2008** | ** ** |
|                                                          |       |                  |          |   |   |
| Average  impaired loans                                       | ** ** | **$**                 | **4,687,791** |   | $ | 1,234,174 |   |
| Interest  income recognized on impaired loans                 | ** ** | **18,798**            |          | 35,437 |   |
| Interest  income recognized on a cash basis on impaired loans | ** ** | **18,798**            |          | 35,437 |   |
|                                                               |            |                       |               |  |  |  |  |

 

From time to time the Bank will grant loans to directors and executiveofficers of the Bank and Company.  Theseloans are made under the same terms and underwriting standards as any othercustomer.  There were outstandingbalances of $6.9 million and $5.5 million of these loans at December 31, 2009and December 31, 2008, respectively. During 2009, there were no new loans and lines of credit issued, $92,000in principal repayments, and $1.4 million of draws on existing lines of creditby directors and executive officers.  AtDecember 31, 2009 there was $173,000 in unused lines of credit to directors andexecutive officers.

 

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**6.     Premises and Equipment**

 

Premises andequipment are summarized by major classifications as follows:

 
| ** **                | ** ** | **December 31,** | ** **    |
|---------------------------|------------|-----------------------|---------------|
| ** **                | ** ** | **2009**              | ** **    | **2008** | ** ** |
|                      |       |                  |          |   |   |
| Land  and buildings       | ** ** | **$**                 | **4,320,486** |   | $ | 4,187,686 |   |
| Furniture  and fixtures   | ** ** | **5,507,255**         |          | 5,476,947 |   |
|                      |       |                  |          |   |   |
| Total                     | ** ** | **9,827,741**         |          | 9,664,633 |   |
| Accumulated  depreciation | ** ** | **(7,297,191**        | **)**         | (6,900,280 | ) |
|                      |       |                  |          |   |   |
| Net                       | ** ** | **$**                 | **2,530,550** |   | $ | 2,764,353 |   |

 

Depreciation andamortization expense for the years ended December 31, 2009 and 2008amounted to approximately $512,000 and $686,000, respectively.

 

**7.     Deposits**

 

Deposits consistof the following major classifications:

 
| ** **                               | ** ** | **December 31,** | ** **      |
|------------------------------------------|------------|-----------------------|-----------------|
| ** **                               | ** ** | **2009**              | ** **      | **2008** | ** ** |
| ** **                               | ** ** | **Amount**            | ** **      | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
|                                     |       |                  |            |   |   |   |   |   |   |
| Money  market deposit accounts           | ** ** | **$**                 | **21,732,949**  | ** ** | **5.7** | **%** | $ | 22,501,110 |   | 6.8 | % |
| Passbook  and statement savings accounts | ** ** | **40,891,707**        | ** **      | **10.8** |   | 39,378,369 |   | 11.9 |   |
| Certificates  of less than $100,000      | ** ** | **194,567,026**       | ** **      | **51.4** |   | 167,750,651 |   | 50.6 |   |
| Certificates  of $100,000 or more        | ** ** | **57,016,155**        | ** **      | **15.1** |   | 40,192,189 |   | 12.1 |   |
| NOW  accounts                            | ** ** | **48,609,281**        | ** **      | **12.9** |   | 48,269,172 |   | 14.5 |   |
| Non-interest  bearing accounts           | ** ** | **15,506,305**        | ** **      | **4.1** |   | 13,609,911 |   | 4.1 |   |
|                                     |       |                  |            |   |   |   |   |   |   |
| Total                                    | ** ** | **$**                 | **378,323,423** | ** ** | **100.0** | **%** | $ | 331,701,402 |   | 100.0 | % |

 

The weightedaverage cost of interest bearing deposits was 2.17% and 2.97% at December 31,2009, and 2008, respectively.  Includedin non-interest bearing deposits are the deposits of Alliance Mutual HoldingCompany, a related party, of $3,627,000 and $ 2,945,000 at December 31,2009 and 2008, respectively.

 

A summary ofcertificates by scheduled maturity was as follows:

 
| ** ** | ** ** | **December 31, 2009** | ** **      |
|------------|------------|---------------------------------|-----------------|
| ** ** | ** ** | **Amount**                      | ** **      | **Percent** | ** ** |
|       |       |                            |            |   |   |
| 2010       | ** ** | **$**                           | **200,111,806** | ** ** | **79.5** | **%** |
| 2011       | ** ** | **43,059,886**                  | ** **      | **17.1** | **%** |
| 2012       | ** ** | **5,231,595**                   | ** **      | **2.1** | **%** |
| 2013       | ** ** | **1,417,480**                   | ** **      | **0.6** | **%** |
| 2014       | ** ** | **948,222**                     | ** **      | **0.4** | **%** |
| Thereafter | ** ** | **814,192**                     | ** **      | **0.3** | **%** |
| Total      | ** ** | **$**                           | **251,583,181** | ** ** | **100.0** | **%** |

 

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A summary ofinterest expense on deposits was as follows:

 
| ** **                          | ** ** | **Year Ended December 31,** | ** **    |
|-------------------------------------|------------|--------------------------------------------|---------------|
| ** **                          | ** ** | **2009**                                   | ** **    | **2008** | ** ** |
|                                |       |                                       |          |   |   |
| Money  market deposit accounts      | ** ** | **$**                                      | **164,263**   |   | $ | 365,767 |   |
| Other  savings deposits             | ** ** | **200,760**                                |          | 215,242 |   |
| Certificates  of less than $100,000 | ** ** | **5,403,356**                              |          | 6,852,213 |   |
| Certificates  of $100,000 or more   | ** ** | **1,282,717**                              |          | 1,159,037 |   |
| NOW  accounts                       | ** ** | **235,983**                                |          | 738,616 |   |
| Total                               | ** ** | **$**                                      | **7,287,079** |   | $ | 9,330,875 |   |

 

**8.     FHLB Advances**

 

FHLB Advances weresummarized as follows:

 
| ** **                | ** ** | ** ** | ** ** | **Interest** | ** ** | **December 31,** | ** **     |
|---------------------------|------------|------------|------------|--------------|------------|-----------------------|----------------|
| ** **                | ** ** | **Due**    | ** ** | **Rate**     | ** ** | **2009**              | ** **     | **2008** | ** ** |
|                      |       |       |       |         |       |                  |           |   |   |
| FHLB  convertible advance |       | 07/22/09   |       | 6.19         | ** ** | **$**                 | —         |   | $ | 5,000,000 |   |
| FHLB  convertible advance |       | 02/03/10   |       | 6.05         | ** ** | **6,000,000**         |           | 6,000,000 |   |
| FHLB  convertible advance |       | 05/17/10   |       | 6.44         | ** ** | **11,000,000**        |           | 11,000,000 |   |
| FHLB  convertible advance |       | 06/28/10   |       | 6.44         | ** ** | **10,000,000**        |           | 10,000,000 |   |
| FHLB  convertible advance |       | 09/22/10   |       | 6.10         | ** ** | **5,000,000**         |           | 5,000,000 |   |
| Total                     | ** ** |       |       |         |       | **$**                 | **32,000,000** |   | $ | 37,000,000 |   |

 

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

 

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

 

The Bank’s unusedcredit line with the FHLB amounted to approximately $20,000,000 at both December 31,2009 and 2008, respectively.  In additionto the $20,000,000 credit line with the FHLB, the Company has the ability toborrow an additional $108.1 million and $127.4 million at both December 31,2009 and December 31, 2008. The weighted average rate on FHLB advances was6.31% and 6.30% at December 31, 2009 and 2008, respectively.  The advances are collateralized by FHLB stockowned by the Bank in addition to a blanket pledge of eligible assets in anamount required to be maintained so that the estimated fair value of sucheligible assets exceeds, at all times, 110% of the outstanding advances.

 

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

 
| ** **                                                   | ** ** | **At or for the Year Ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                   | ** ** | **(Dollars in Thousands)**                     | ** ** |
| ** **                                                   | ** ** | **2009**                                       | ** ** | **2008** | ** ** |
|                                                         |       |                                           |       |   |   |
| FHLB  of Pittsburgh advances:                                |       |                                           |       |   |   |
| Average  balance outstanding                                 | ** ** | **$**                                          | **34,767** |   | $ | 37,000 |   |
| Maximum  amount outstanding at any month-end during the year | ** ** | **37,000**                                     |       | 37,100 |   |
| Balance  outstanding at end of year                          | ** ** | **32,000**                                     |       | 37,000 |   |
| Weighted  average interest rate during the year              | ** ** | **6.39**                                       | **%**      | 6.30 | % |
| Weighted  average interest rate at end of year               | ** ** | **6.31**                                       | **%**      | 6.30 | % |
|                                                         | ** ** | ** **                                     |       |   |   |
| Total  borrowings:                                           | ** ** | ** **                                     |       |   |   |
| Average  balance outstanding                                 | ** ** | **$**                                          | **34,811** |   | $ | 37,815 |   |
| Maximum  amount outstanding at any month-end during the year | ** ** | **37,082**                                     |       | 39,812 |   |
| Balance  outstanding at end of year                          | ** ** | **32,021**                                     |       | 37,198 |   |
| Weighted  average interest rate during the year              | ** ** | **6.38**                                       | **%**      | 6.27 | % |
| Weighted  average interest rate at end of year               | ** ** | **6.31**                                       | **%**      | 6.30 | % |

 

**9.     Income Taxes**

 

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

 

Retained earningsat both December 31, 2009 and 2008 included approximately $7.1 million,representing bad debt deductions, for which no deferred income taxes have beenprovided.

 

The Company has noliability recorded related to unrecognized tax positions.  No expense has been recorded or accrued forinterest or penalties.

 

The Company filesincome tax returns in the U.S. Federal jurisdiction and in Pennsylvania. Withlimited exception, the Company is no longer subject to U.S. Federal and Pennsylvaniaexaminations by tax authorities before 2006.

 

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

 
| ** **                                            | ** ** | **December 31,** | ** **    |
|-------------------------------------------------------|------------|-----------------------|---------------|
| ** **                                            | ** ** | **2009**              | ** **    | **2008** | ** ** |
| Deferred  tax assets:                                 |       |                  |          |   |   |
| Depreciation  and amortization                        | ** ** | **$**                 | **121,380**   |   | $ | 52,020 |   |
| Allowance  for loan losses                            | ** ** | **1,202,580**         |          | 1,077,460 |   |
| Additional  minimum liability for retirement plans    | ** ** | **567,601**           |          | 801,309 |   |
| Securities  impairment                                | ** ** | **317,900**           |          | 317,900 |   |
| Supplemental  retirement benefits                     | ** ** | **1,201,900**         |          | 1,157,360 |   |
| Capital  loss carryforward                            | ** ** | **327,760**           |          | 327,760 |   |
| Alternative  minimum tax                              | ** ** | **1,347,000**         |          | 1,216,000 |   |
| State  tax loss carryfowards                          | ** ** | **336,776**           |          | 316,225 |   |
| Other                                                 | ** ** | **197,752**           |          | 106,854 |   |
| Total  deferred tax assets                            | ** ** | **5,620,649**         |          | 5,372,888 |   |
|                                                  | ** ** | ** **            | ** **    |   |   |
| Valuation  allowance                                  | ** ** | **(336,776**          | **)**         | (316,225 | ) |
|                                                  |       |                  |          |   |   |
| Deferred  tax liabilities:                            |       |                  |          |   |   |
| Deferred  loan fees                                   | ** ** | **(94,860**           | **)**         | (103,020 | ) |
| Pension  Plan                                         | ** ** | **(375,360**          | **)**         | (303,280 | ) |
| Net  unrealized gain on securities available for sale | ** ** | **(267,399**          | **)**         | (322,196 | ) |
| Total  deferred tax liabilities                       | ** ** | **(737,619**          | **)**         | (728,496 | ) |
|                                                  | ** ** | ** **            |          |   |   |
| Net  deferred tax asset                               | ** ** | **$**                 | **4,546,254** |   | $ | 4,328,167 |   |

 

As of December 31,2009, the Bank had approximately $2.9 million of State NOL carryforwardsexpiring through 2012.  The Company hasrecorded a full valuation allowance for these carryforwards as projected Stateincome at the Bank is not anticipated to be sufficient to realize these benefits.

 

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

 
| ** ** | ** ** | **2009**     | ** **  | **2008** | ** ** |
|------------|------------|--------------|-------------|----------|------------|
|       |       |         |        |     |       |
| Current    | ** ** | **$**        | **356,000** |     | $          | 255,076 |   |
| Deferred   | ** ** | **(397,000** | **)**       | (665,676 | )          |
|       |       |         |        |     |       |
| Total      | ** ** | **$**        | **(41,000** | **)**    | $          | (410,600 | ) |

 

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

 
| ** **                                                | ** ** | **Year Ended December 31,** | ** **  |
|-----------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                                | ** ** | **2009**                                   | ** **  | **2008** | ** ** |
| ** **                                                | ** ** | ** **                                 | ** **  | **Percentage** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                                | ** ** | ** **                                 | ** **  | **of Pretax** | ** ** | ** ** | ** ** | **of Pretax** | ** ** |
| ** **                                                | ** ** | **Amount**                                 | ** **  | **Income** | ** ** | **Amount** | ** ** | **Income** | ** ** |
|                                                      |       |                                       |        |   |   |   |   |   |   |
| Expense  at statutory rate                                | ** ** | **$**                                      | **448,017** | ** ** | **34.0** | **%** | $ | 65,972 |   | 34.0 | % |
| Adjustments  resulting from:                              |       |                                       |        |   |   |   |   |   |   |
| Tax-exempt  income                                        | ** ** | **(398,121**                               | **)**       | **(30.2** | **)** | (355,300 | ) | (183.1 | ) |
| Increase  in cash surrender value of life insurance       | ** ** | **(120,783**                               | **)**       | **(9.2** | **)** | (124,753 | ) | (64.3 | ) |
| Other                                                     | ** ** | **29,887**                                 | ** **  | **2.3** |   | 3,481 |   | 1.8 |   |
| Income  tax benefit per consolidated statements of income | ** ** | **$**                                      | **(41,000** | **)** | **(3.1** | **)%** | $ | (410,600 | ) | (211.6 | )% |

 

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**10.  Commitments and Contingencies**

 

The Bank had approximately $7.8 million and $6.4 million in outstandingloan commitments, excluding unused lines of credit and the undisbursed portionof loans in process, at December 31, 2009 and 2008, respectively, whichwere expected to fund within the next three months.  Unused commitments under unused lines ofcredit amounted to $30.5 million and $31.6 million at December 31, 2009and December 31, 2008, respectively. In addition, the Bank had $1.4 million and $1.3 million in standbyletters of credit at December 31, 2009 and 2008, respectively, which weresecured by cash, marketable securities and real estate.  All commitments are issued using the Bank’scurrent loan policies and underwriting guidelines and the breakdown betweenfixed-rate and adjustable-rate loans is as follows:

 
| ** **                                | ** ** | **December 31,** | ** **    |
|-------------------------------------------|------------|-----------------------|---------------|
| ** **                                | ** ** | **2009**              | ** **    | **2008** | ** ** |
|                                      |       |                  |          |   |   |
| Fixed-rate  (ranging from 6.00% to 8.00%) | ** ** | **$**                 | **7,455,322** |   | $ | 3,179,750 |   |
| Adjustable-rate                           | ** ** | **382,250**           |          | 3,239,675 |   |
|                                      |       |                  |          |   |   |
| Total                                     | ** ** | **$**                 | **7,837,572** |   | $ | 6,419,425 |   |

 

Depending on cashflow, interest rate risk, risk management and other considerations, longer termfixed-rate residential loans are sold in the secondary market.  There were no outstanding commitments to sellloans at December 31, 2009.

 

The Bank isinvolved in legal proceedings and litigation arising in the ordinary course ofbusiness. One such matter involves a number of related issues arising from alending relationship with a certain borrower. In March 2004, the borrower filed a Complaint alleging that a certaindeed in lieu of foreclosure held in escrow had been wrongfully recorded.  In the opinion of management, the outcome ofsuch proceedings and litigation currently pending will not materially affectthe Company consolidated financial statements. However, there can be no assurance that any of the outstanding legalproceedings and litigation to which the Company is a party will not be decidedadversely to the Bank’s interests and have a material adverse effect on theconsolidated financial statements.

 

Expenses relatedto rent for office buildings for 2009 and 2008 were $438,000 and $434,000,respectively.  The Bank maintains officesat nine locations, including seven bank offices which it rents under leasesexpiring over the next 13 years.  Thefollowing is a summary of future minimum rental payments required under alloperating leases as of December 31, 2009:

 
| ** **                     | ** ** | **Year Ending December 31,** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|
|                           |       |                                        |       |
| 2010                           |       | $                                           | 429,063    |   |
| 2011                           |       | 326,317                                     |       |
| 2012                           |       | 252,970                                     |       |
| 2013                           |       | 230,123                                     |       |
| 2014                           |       | 230,870                                     |       |
| Thereafter                     |       | 1,077,690                                   |       |
| Total  minimum rental payments |       | $                                           | 2,547,033  |   |

 

**11.  Retirement Plans**

 

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

 

Pension expense was$388,265 and $229,506, in 2009 and 2008, respectively.  The contribution for the profit-sharing plan was$110,000 and $100,000 in 2009 and 2008, respectively.

 

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The net pension costs forthe years ended December 31, 2009 and 2008 included the followingcomponents:

 
| ** **                                                                                                | ** ** | **2009**     | ** **   | **2008**    | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------|--------------|-------------|------------|
| **Net Periodic Benefit Cost**                                                                             |       |         |         |        |       |
| Service  Cost                                                                                             | ** ** | **$**        | **297,641**  |        | $          | 295,877 |   |
| Interest  Cost                                                                                            | ** ** | **264,737**  |         | 245,762     |       |
| Expected  Return on Plan Assets                                                                           | ** ** | **(288,812** | **)**        | (330,789    | )          |
| Amortization  of Transition Obligation/(Asset)                                                            | ** ** | **—**   |         | —      |       |
| Amortization  of Prior Service Cost                                                                       | ** ** | **12,685**   |         | 12,685      |       |
| Amortization  of Loss                                                                                     | ** ** | **102,014**  |         | 5,971       |       |
| Net  Periodic Benefit Cost                                                                                | ** ** | **$**        | **388,265**  |        | $          | 229,506 |   |
| ** **                                                                                                | ** ** | ** **   | ** **   | ** **  | ** ** |
| **Other changes in plan assets and benefit  obligations recognized in other comprehensive income (loss)** | ** ** | ** **   | ** **   | ** **  | ** ** |
| Net  loss/(gain)                                                                                          | ** ** | **$**        | **(561,200** | **)**       | **$**      | **1,264,076** | ** ** |
| Amortization  of net loss                                                                                 | ** ** | **(102,014** | **)**        | **(5,971**  | **)**      |
| Amortization  of prior service cost                                                                       | ** ** | **(12,685**  | **)**        | **(12,685** | **)**      |
| Amortization  of transition obligation                                                                    | ** ** | **—**   | ** **   | **—**  | ** ** |
| Total  recognized in other comprehensive income (loss)                                                    | ** ** | **$**        | **(675,899** | **)**       | **$**      | **1,245,420** | ** ** |
|                                                                                                      | ** ** | ** **   | ** **   | ** **  | ** ** |
| Total recognized  in net periodic benefit cost and other comprehensive income (loss)                      | ** ** | **$**        | **(287,634** | **)**       | **$**      | **1,474,926** | ** ** |

 

The estimated net loss and prior service cost for the defined benefitpension plan that will be amortized from accumulated other comprehensive income(loss) into net periodic benefit cost over the next fiscal year are $49,837 and$12,685, respectively.

 
| ** **                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| **Key Assumptions**                          |       |     |       |     |       |
| Discount  Rate for Net Periodic Benefit Cost | ** ** | **6.00** | **%**      | 6.00     | %          |
| Salary  Scale for Net Periodic Benefit Cost  | ** ** | **4.00** | **%**      | 4.00     | %          |
| Expected  Return on Plan Assets              | ** ** | **8.00** | **%**      | 8.00     | %          |
|                                         |       |     |       |     |       |
| Discount  Rate for Plan Obligations          | ** ** | **6.00** | **%**      | 6.00     | %          |
| Salary  Scale for Plan Obligations           | ** ** | **4.00** | **%**      | 4.00     | %          |

 

A summary of reconciliation and disclosure information required underFASB ASC Topic 715, Compensation-Retirement Benefits, for the defined benefitpension plan is as follows:

 
| ** **                                                      | ** ** | **2009**      | ** **    | **2008**      | ** ** |
|-----------------------------------------------------------------|------------|---------------|---------------|---------------|------------|
| **Change in Projected Benefit Obligation**                      |       |          |          |          |       |
| Projected  Benefit Obligation at Beginning of Year              | ** ** | **$**         | **4,439,594** | ** **    | **$**      | **4,354,167** | ** ** |
| Service  Cost                                                   | ** ** | **297,641**   | ** **    | **295,877**   | ** ** |
| Interest  Cost                                                  | ** ** | **264,737**   | ** **    | **245,762**   | ** ** |
| Benefits  paid                                                  | ** ** | **(406,277**  | **)**         | **(494,381**  | **)**      |
| Actuarial  Loss                                                 | ** ** | **68,021**    | ** **    | **38,169**    | ** ** |
| Projected  Benefit Obligation at End of Year                    | ** ** | **4,663,716** | ** **    | **4,439,594** | ** ** |
|                                                            |       |          |          |          |       |
| **Change in Plan Assets During Year**                           |       |          |          |          |       |
| Fair  Value of Plan Assets at Beginning of Year                 | ** ** | **3,193,874** |          | 4,183,373     |       |
| Actual  Return on Plan Assets                                   | ** ** | **918,033**   |          | (895,118      | )          |
| Employer  Contributions                                         | ** ** | **600,000**   |          | 400,000       |       |
| Benefits  Paid                                                  | ** ** | **(406,277**  | **)**         | (494,381      | )          |
| Fair  Value of Plan Assets at End of Year                       | ** ** | **4,305,630** |          | 3,193,874     |       |
|                                                            | ** ** | ** **    |          |          |       |
| Funded  Status at End of Year, included in other liabilities    | ** ** | **$**         | **(358,086**  | **)**         | $          | (1,245,720 | ) |
| ** **                                                      | ** ** | ** **    | ** **    | ** **    | ** ** |
| **Benefit Obligations at End of Year**                          | ** ** | ** **    | ** **    | ** **    | ** ** |
| Accumulated  Benefit Obligation                                 | ** ** | **$**         | **3,742,316** | ** **    | **$**      | **3,293,549** | ** ** |
|                                                            | ** ** | ** **    | ** **    | ** **    | ** ** |
| **Amounts Recognized in Accumulated Other  Comprehensive Loss** |       |          |          |          |       |
| Net  loss                                                       | ** ** | **$**         | **1,082,363** |          | $          | 1,745,577 |   |
| Prior  service cost                                             | ** ** | **114,167**   |          | 126,852       |       |
| Total                                                           | ** ** | **$**         | **1,196,530** |          | $          | 1,872,429 |   |

 

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**Expected Contributions to theTrust**

 

TheBank plans to contribute $400,000 to the pension plan in 2010.

 

**Expected Benefit Payments Fromthe Trust**

 
| 2010      |   | $         | 90,201 |   |
|-----------|--------|-----------|--------|--------|
| 2011      |   | 199,605   |   |
| 2012      |   | 422,517   |   |
| 2013      |   | 144,917   |   |
| 2014      |   | 761,928   |   |
| 2015-2019 |   | 3,533,845 |   |

 

Asset allocation for the pension planincludes equity securities ranging from 55% to 75%, debt securities rangingfrom 25% to 45% and cash and cash equivalents ranging from 0% to 10%.  The following table shows the assetallocation as of December 31, 2009.

 
| ** **                              | ** ** | ** ** | ** ** | **Percentage**     | ** ** |
|-----------------------------------------|------------|------------|------------|--------------------|------------|
| **Investment Class**               | ** ** | ** ** | ** ** | **of Assets** | ** ** |
| Fixed Income Investments                |       | $          | 1,256,648  |               | 29.2       | % |
| Equity Investments                      |       | 2,648,074  |       | 61.5               | %          |
| Cash and Cash Equivalents               |       | 400,908    |       | 9.3                | %          |
|                                    |       |       |       |               |       |
| Fair Value as of December 31, 2009 |       | $          | 4,305,630  |               | 100.0      | % |

 

The Fixed income investments is 50.9%invested in a total return bond fund and 49.1% invested in a short terminvestment grade fund.  The Equityinvestments consist of 10.0% small-cap mutual funds, 10.2% mid-cap mutualfunds, 65.2% large-cap mutual funds, and 14.6% international mutual funds.

 

The following table summarizes assetsmeasured at fair value on a recurring basis as of December 31, 2009,segregated by the level of the valuation inputs within the fair value hierarchyutilized to measure fair value (in thousands):

 
| **Description** | ** ** | **Total**     | ** **    | **(Level 1)********Quoted Prices in  Active Markets  for Identical  Assets** | ** ** | **(Level 2)********Significant********Other********Observable********Inputs** | ** ** | **(Level 3)********Significant********Unobservable********Inputs** | ** ** |
|-----------------|------------|---------------|---------------|------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
|            | ** ** |          | ** **    |                                                                         | ** ** |                                                                          | ** ** |                                                               | ** ** |
| Cash            | ** ** | **$**         | **400,908**   | ** **                                                                   | **$**      | **400,908**                                                                   | ** ** | **$**                                                              | **—** | ** ** | **$** | **—** | ** ** |
| Mutual Funds    | ** ** | **3,904,722** | ** **    | **3,904,722**                                                                | ** ** | **—**                                                                    | ** ** | **—**                                                         | ** ** |
| Total           | ** ** | **$**         | **4,305,630** | ** **                                                                   | **$**      | **4,305,630**                                                                 | ** ** | **$**                                                              | **—** | ** ** | **$** | **—** | ** ** |

 

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The2008 fair value measurements by level within the fair value hierarchy used at December 31,2008 are as follows:

 
| **Description** | ** ** | **Total**     | ** **    | **(Level 1)********Quoted Prices in  Active Markets  for Identical  Assets** | ** ** | **(Level 2)********Significant********Other********Observable********Inputs** | ** ** | **(Level 3)********Significant********Unobservable********Inputs** | ** ** |
|-----------------|------------|---------------|---------------|------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
|            | ** ** |          | ** **    |                                                                         | ** ** |                                                                          | ** ** |                                                               | ** ** |
| Cash            | ** ** | **$**         | **422,930**   | ** **                                                                   | **$**      | **422,930**                                                                   | ** ** | **$**                                                              | **—** | ** ** | **$** | **—** | ** ** |
| Mutual Funds    | ** ** | **2,770,944** | ** **    | **2,770,944**                                                                | ** ** | **—**                                                                    | ** ** | **—**                                                         | ** ** |
| Total           | ** ** | **$**         | **3,193,874** | ** **                                                                   | **$**      | **3,193,874**                                                                 | ** ** | **$**                                                              | **—** | ** ** | **$** | **—** | ** ** |

 

In July 2000, the Bank entered into aNonqualified Retirement and Death Benefit Agreement (the “Agreement”) withcertain officers of the Bank.  Thepurpose of the Agreement is to provide the officers with supplementalretirement benefits equal to a specified percentage of final composition and apre-retirement death benefit if the officer does not attain the specific agerequirement.   A summary of thereconciliation and disclosure information required under FASB Topic ASC 715,Compensation-Retirement Benefits, for the Agreement is as follows:

** **
| ** **                                                              | ** ** | **Year Ended**        | ** **     |
|-------------------------------------------------------------------------|------------|-----------------------|----------------|
| ** **                                                              | ** ** | **December 31,** | ** **     |
| ** **                                                              | ** ** | **2009**              | ** **     | **2008** | ** ** |
| **Change in benefit obligation during year**                            |       |                  |           |   |   |
| Benefit obligation at beginning of year                                 | ** ** | **$**                 | **3,888,031**  |   | $ | 3,778,374 |   |
| Service cost                                                            | ** ** | **37,228**            |           | 35,116 |   |
| Interest cost                                                           | ** ** | **228,518**           |           | 221,939 |   |
| Benefit payments                                                        | ** ** | **(158,792**          | **)**          | (158,792 | ) |
| Actuarial loss                                                          | ** ** | **12,413**            |           | 11,394 |   |
| Benefit obligation at end of year                                       | ** ** | **4,007,398**         |           | 3,888,031 |   |
| ** **                                                              | ** ** | ** **            |           |   |   |
| **Change in plan assets during year**                                   | ** ** | ** **            |           |   |   |
| Fair value of plan assets at beginning of year                          | ** ** | **—**            |           | — |   |
| Employer contributions                                                  | ** ** | **158,792**           |           | 158,792 |   |
| Benefit payments                                                        | ** ** | **(158,792**          | **)**          | (158,792 | ) |
| Fair value of plan assets at end of year                                | ** ** | **—**            |           | — |   |
| **Funded status**                                                       |       |                  |           |   |   |
| Funded status (included in other liabilities)                           | ** ** | **(4,007,398**        | **)**          | (3,888,031 | ) |
| Unrecognized net loss                                                   | ** ** | **472,884**           |           | 484,360 |   |
| Unrecognized prior service cost                                         | ** ** | **—**            |           | — |   |
| Net liability recognized                                                | ** ** | **$**                 | **(3,534,514** | **)** | $ | (3,403,671 | ) |
| ** **                                                              |       |                  |           |   |   |
| **Change in accumulated other comprehensive income**                    |       |                  |           |   |   |
| Accumulated other comprehensive income at beginning of year             | ** ** | **$**                 | **484,360**    |   | $ | 737,068 |   |
| Amortization of net loss                                                | ** ** | **(23,889**           | **)**          | (31,710 | ) |
| Actuarial gain                                                          | ** ** | **12,413**            |           | 11,654 |   |
| Amortization of prior service cost                                      | ** ** | **—**            |           | (232,652 | ) |
| Net change in other comprehensive income (loss)                         | ** ** | **(11,476**           | **)**          | (252,708 | ) |
| Accumulated other comprehensive income at end of year                   | ** ** | **$**                 | **472,884**    |   | $ | 484,360 |   |
|                                                                    |       |                  |           |   |   |
| **Expected cash-flow information for years after  current fiscal year** | ** ** | ** **            | ** **     | ** ** | ** ** |
| 2010                                                                    |       |                  |           | $ | 167,814 |   |
| 2011                                                                    |       |                  |           | 267,053 |   |
| 2012                                                                    |       |                  |           | 267,053 |   |
| 2013                                                                    |       |                  |           | 287,501 |   |
| 2014                                                                    |       |                  |           | 338,059 |   |
| 2015-2019                                                               |       |                  |           | 1,901,060 |   |

 

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| ** **                         | ** ** | **2009**    | ** **  | **2008** | ** ** |
|------------------------------------|------------|-------------|-------------|----------|------------|
| **Net periodic benefit cost**      | ** ** | ** **  |        |     |       |
| Service cost                       | ** ** | **$**       | **37,228**  |     | $          | 35,116 |   |
| Interest cost                      | ** ** | **228,518** |        | 221,939  |       |
| Amortization of prior service cost | ** ** | **—**  |        | 232,652  |       |
| Amortization of net loss           | ** ** | **23,889**  |        | 31,710   |       |
| Net periodic benefit cost          | ** ** | **$**       | **289,635** |     | $          | 521,417 |   |
| ** **                         | ** ** | ** **  |        |     |       |
| **Key Assumptions**                | ** ** | ** **  |        |     |       |
| Discount rate during the year      | ** ** | **6.00**    | **%**       | 6.00     | %          |
| Discount rate at end of year       | ** ** | **6.00**    | **%**       | 6.00     | %          |

 

**Employee Stock Ownership Plan**

 

The Bank has an Employee Stock Ownership Plan(“ESOP”) for the benefit of employees who meet the eligibility requirements asdefined in the plan. The ESOP trust purchased 90,333 shares of common stockusing proceeds of a loan from the Company. The Bank makes cash contributions tothe ESOP on an annual basis sufficient to enable the ESOP to make the requiredloan payments to the Company. The loan bears an interest rate of 8.25% withprincipal and interest payable quarterly in equal installments over eightyears. The loan is secured by the shares of the stock purchased.

 

As the debt is repaid, shares are releasedfrom the collateral and allocated to qualified employees. Accordingly, theshares pledged as collateral are reported as unearned ESOP shares in theConsolidated Statements of Financial Condition. As shares are released fromcollateral, the Bank reports compensation expense equal to the current marketprice of the shares, and the shares become outstanding for earnings per sharecomputations. The compensation expense is recorded on a monthly basis. TheCompany’s expense for the ESOP was $99,435 and $102,344 for the years ended December 31,2009 and 2008, respectively.

 

The following table presents the componentsof the ESOP shares:

 
| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Shares released for allocation | ** ** | **30,110**            |       | 18,066 |   |
| Unreleased shares              | ** ** | **60,223**            |       | 72,267 |   |
| Total ESOP shares              | ** ** | **90,333**            |       | 90,333 |   |

 

**12.          Regulatory Capital Requirements**

 

The Bank is subject to various regulatory capital requirementsadministered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certainmandatory and possibly additional discretionary actions by regulators that, ifundertaken, could have a direct material effect on the Bank’s financialstatements.  Under capital adequacyguidelines and the regulatory framework for prompt corrective action, the Bankmust meet specific capital guidelines that involve quantitative measures of theBank’s assets, liabilities and certain off-balance-sheet items as calculatedunder regulatory accounting practices. The Bank’s capital amounts and classification are also subject toqualitative judgments by the regulators about components, risk weightings andother factors.  Qualitative measuresestablished by regulation to ensure capital adequacy require the Bank tomaintain minimum amounts and ratios (set forth in the following table) of Totaland Tier 1 capital (as defined in the regulations) to risk weighted assets (asdefined), and of Tier 1 capital (as defined) to average assets (as defined).  Management believes, as of December 31,2009, that the Bank meets all capital adequacy requirements to which it issubject.

 

As of December 31, 2009, the most recent notification from theFDIC categorized the Bank as well capitalized under the regulatory frameworkfor prompt corrective action.  To becategorized as well capitalized, the Bank must maintain minimum totalrisk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in thetable.  There are no conditions or eventssince that notification that management believes have changed the Bank’scategory.

 

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The Bank’s actual capital amounts and ratios are presented in the tablebelow:

 
| ** **                                | ** ** | ** **                           | ** ** | ** **                         | ** ** | **To Be Well**   | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|----------------------------|------------|
| ** **                                | ** ** | ** **                           | ** ** | ** **                         | ** ** | **Capitalized Under** | ** ** |
| ** **                                | ** ** | ** **                           | ** ** | **For Capital Adequacy** | ** ** | **Prompt Corrective** | ** ** |
| ** **                                | ** ** | **Actual**                           | ** ** | **Purposes**                       | ** ** | **Action Provisions** | ** ** |
| ** **                                | ** ** | **Amount**                           | ** ** | **Ratio**                          | ** ** | **Amount**                 | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                                | ** ** | **(Dollars in Thousands)** | ** ** |
| **As of December 31, 2009:**         |       |                                 |       |                               |       |                       |       |   |   |   |   |   |   |
| Tier 1 Capital  (to average assets)       | ** ** | **$**                                | **46,815** | ** **                         | **10.17**  | **%**                      | **$**      | **18,415** | ** ** | **4.00** | **%** | **$** | **23,019** | ** ** | **5.00** | **%** |
| Tier 1 Capital  (to risk-weighted assets) | ** ** | **46,815**                           | ** ** | **15.97**                          | ** ** | **11,728**                 | ** ** | **4.00** | ** ** | **17,592** | ** ** | **6.00** | ** ** |
| Total Capital  (to risk-weighted assets)  | ** ** | **50,353**                           | ** ** | **17.17**                          | ** ** | **23,456**                 | ** ** | **8.00** | ** ** | **29,320** | ** ** | **10.00** | ** ** |
|                                      |       |                                 |       |                               |       |                       |       |   |   |   |   |   |   |
| As of December 31, 2008:             |       |                                 |       |                               |       |                       |       |   |   |   |   |   |   |
| Tier 1 Capital  (to average assets)       |       | $                                    | 45,349     |                               | 10.67      | %                          | $          | 17,007 |   | 4.00 | % | $ | 21,259 |   | 5.00 | % |
| Tier 1 Capital  (to risk-weighted assets) |       | 45,349                               |       | 16.33                              |       | 11,107                     |       | 4.00 |   | 16,660 |   | 6.00 |   |
| Total Capital  (to risk-weighted assets)  |       | 48,518                               |       | 17.47                              |       | 22,214                     |       | 8.00 |   | 27,767 |   | 10.00 |   |

 

The Bank’s capital at December 31, 2009 and 2008 for financialstatement purposes differs from Tier 1 capital amounts by $519,000 and$625,000, respectively, representing the exclusion for regulatory purposes ofunrealized gains and losses on securities available for sale and $1.1 millionand $1.6 million, respectively, representing the exclusion of amounts inaccumulated other comprehensive loss from the application of FASB ASC Topic 715,Compensation-Retirement Benefits.

 

**13. Related Party Transactions**

 

The Bank maintains a lease agreement with the Holding Company for oneof its office locations. The initial lease term expires in September 2015and the Bank has paid $42,000 each year for the years ended December 31,2009 and 2008.  In addition, the Bankmaintains a management fee agreement with the Holding Company which providesfor the sharing of certain company related expenses.  Such expenses include salaries and benefits,insurance expenses, professional fees and directors fees.  The Bank has received management feesamounting to $360,000 and $384,000 for the years ended December 31, 2009and 2008, respectively.

 

**14. Fair Value Measurements and Fair Values of FinancialInstruments**

** **

Managementuses its best judgment in estimating the fair value of the Company financialinstruments; however, there are inherent weaknesses in any estimationtechnique.  Therefore, for substantiallyall financial instruments, the fair value estimates herein are not necessarilyindicative of the amounts the Company could have realized in a salestransaction on the dates indicated.  Theestimated fair value amounts have been measured as of their respectiveyear-ends and have not been re-evaluated or updated for purposes of thesefinancial statements subsequent to those respective dates.  As such, the estimated fair values of thesefinancial instruments subsequent to the respective reporting dates may bedifferent than the amounts reported at each year-end.

 

FASB ASC Topic 820, Fair Value Measurementsand Disclosures, establishes a fair value hierarchy that prioritizes the inputsto validation methods used to measure fair value.  The hierarchy gives the highest priority tounadjusted quoted prices in active markets for identical assets or liabilities(Level 1 measurements) and the lowest priority to unobservable inputs (Level 3measurements).  The three levels of fairvalue hierarchy under FASB ASC Topic 820 are as follows:

 

*Level 1*:  Unadjustedquoted prices in active markets that are accessible at the measurement date foridentical, unrestricted assets or liabilities.

 

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*Level 2*:  Quotedprices in markets that are not active, or inputs that are observable eitherdirectly or indirectly, for substantially the full term of the asset orliability.

 

*Level 3*:  Prices orvaluation techniques that require inputs that are both significant to fairvalue measurement and unobservable (i.e. support with little or no market valueactivity).

 

An asset or liability’s level within the fairvalue hierarchy is based on the lowest level of input that is significant tothe fair value measurement.

 

The following methods and assumptions wereused to estimate the fair value of the Company’s instruments:

 

**Cash andCash Equivalents (Carried at Cost),**The carrying amounts reported in the consolidated statements of financialcondition for cash and short-term instruments approximate those assets’ fairvalues.

** **

**Investmentand Mortgage-Backed Securities,**The fair value of securities available for sale (carried at fair value)and held to maturity (carried at amortized cost) are determined by obtainingquoted market prices on nationally recognized securities exchanges(Level 1), or matrix pricing (Level 2), which is a mathematical techniqueused widely in the industry to value debt securities without relyingexclusively on quoted market prices for the specific securities but rather byrelying on the securities’ relationship to other benchmark quoted prices.  For certain securities which are not tradedin active markets or are subject to transfer restrictions, valuations areadjusted to reflect illiquidity and/or non-transferability, and suchadjustments are generally based on available market evidence (Level 3).  In the absence of such evidence, management’sbest estimate is used.  Management’s bestestimate consists of both internal and external support on certain Level 3investments.  Internal cash flow modelsusing a present value formula that includes assumptions market participantswould use along with indicative exit pricing obtained from broker/dealers(where available) were used to support fair values of certain Level 3investments.

** **

**LoansReceivable (Carried at Cost),**The fair values of loans are estimated using discounted cash flowanalyses, using market rates at the balance sheet date that reflect the creditand interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractualmaturity or call dates, projected repayments and prepayments of principal.  Generally, for variable rate loans thatreprice frequently and with no significant change in credit risk, fair valuesare based on carrying values.

** **

**ImpairedLoans (Generally Carried at Fair Value),**Impaired loans are those in which the Bank hasmeasured impairment generally based on the fair value of the loan’scollateral.  Fair value is generallydetermined based upon independent third-party appraisals of the properties, ordiscounted cash flows based upon the expected proceeds.  These assets are included as Level 3 fairvalues, based upon the lowest level of input that is significant to the fairvalue measurements.  The fair valueconsists of the loan balances, net of any valuation allowance.

** **

**OtherReal Estate Owned,**OREO assets are adjusted to fair value less estimated selling costs upontransfer of the loans to OREO. Subsequently, OREO assets are carried at the lower of carrying value orfair value. Fair value is based upon independent market prices, appraisedvalues of the collateral or management’s estimation of the value of thecollateral.  There assets are included aslevel 3 fair values.

** **

**FHLBStock (Carried at Cost),**The carrying amount of FHLB stock approximates fair value, and considersthe limited marketability of such securities.

** **

**AccruedInterest Receivable and Payable (Carried at Cost),**The carrying amount of accrued interestreceivable and accrued interest payable approximates its fair value.

** **

**Deposits(Carried at Cost),**The fair values disclosed for demand deposits (e.g., interest andnoninterest checking, passbook savings and money market accounts) are, bydefinition, equal to the amount payable on demand at the reporting date (i.e.,their carrying amounts).  Fair values forfixed-rate certificates of deposit are estimated using a discounted cash flowcalculation that applies interest rates currently being offered in the marketon certificates to a schedule of aggregated expected monthly maturities on timedeposits.

 

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**FHLBAdvances and Other Borrowed Money (Carried at Cost),**Fair values of FHLB advances and otherborrowed money are estimated using discounted cash flow analysis, based onquoted prices for new FHLB advances and/or other borrower money with similarcredit risk characteristics, terms and remaining maturity.  These prices obtained from this active marketrepresent a market value that is deemed to represent the transfer price if theliability were assumed by a third party.

** **

**Off-BalanceSheet Financial Instruments,**Fair values for the Company’s off-balance sheet financial instruments(lending commitments and letters of credit) are based on fees currently chargedin the market to enter into similar agreements, taking into account, theremaining terms of the agreements and the counterparties’ credit standing.

** **

The following table summarizes assetsmeasured at fair value on a recurring basis as of December 31, 2009,segregated by the level of the valuation inputs within the fair value hierarchyutilized to measure fair value (in thousands):

 
| **Description**                               | ** ** | **Total**  | ** ** | **(Level 1)********Quoted Prices in  Active Markets  for Identical  Assets** | ** ** | **(Level 2)********Significant********Other********Observable********Inputs** | ** ** | **(Level 3)********Significant********Unobservable********Inputs** | ** ** |
|-----------------------------------------------|------------|------------|------------|------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
|                                          | ** ** |       | ** ** |                                                                         | ** ** |                                                                          | ** ** |                                                               | ** ** |
| Investment securities available for sale      | ** ** | **$**      | **28,890** | ** **                                                                   | **$**      | **—**                                                                    | ** ** | **$**                                                              | **28,890** | ** ** | **$** | **—** | ** ** |
| Mortgage backed securities available for sale | ** ** | **23,355** | ** ** | **—**                                                                   | ** ** | **23,355**                                                                    | ** ** | **—**                                                         | ** ** |
| Total                                         | ** ** | **$**      | **52,245** | ** **                                                                   | **$**      | **—**                                                                    | ** ** | **$**                                                              | **52,245** | ** ** | **$** | **—** | ** ** |

 

Forassets measured at fair value on a nonrecurring basis, the fair valuemeasurements by level within the fair value hierarchy used at December 31,2009 are as follows:

 
| **Description**         | ** ** | **Total**  | ** ** | **(Level 1)********Prices in Active  Markets for  Identical Assets** | ** ** | **(Level 2)********Significant********Other********Observable********Inputs** | ** ** | **(Level 3)********Significant********Unobservable********Inputs** | ** ** |
|-------------------------|------------|------------|------------|----------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
|                    | ** ** |       | ** ** |                                                                 | ** ** |                                                                          | ** ** |                                                               | ** ** |
| Impaired loans          | ** ** | **$**      | **4,327**  | ** **                                                           | **$**      | **—**                                                                    | ** ** | **$**                                                              | **—** | ** ** | **$** | **4,327** | ** ** |
|                    | ** ** | ** ** | ** ** | ** **                                                           | ** ** | ** **                                                                    | ** ** | ** **                                                         | ** ** |
| Other real estate owned | ** ** | **2,968**  | ** ** | **—**                                                           | ** ** | **—**                                                                    | ** ** | **2,968**                                                          | ** ** |
| Total                   | ** ** | **$**      | **7,295**  | ** **                                                           | **$**      | **—**                                                                    | ** ** | **$**                                                              | **—** | ** ** | **$** | **7,295** | ** ** |

 

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Forassets measured at fair value on a recurring basis, the fair value measurementsby level within the fair value hierarchy used at December 31, 2008 are asfollows:

 
| **Description**                               | ** ** | **Total** | ** ** | **(Level 1)********Quoted Prices in  Active Markets  for Identical  Assets** | ** ** | **(Level 2)********Significant********Other********Observable********Inputs** | ** ** | **(Level 3)********Significant********Unobservable********Inputs** | ** ** |
|-----------------------------------------------|------------|-----------|------------|------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
|                                          |       |      |       |                                                                         |       |                                                                          | ** ** |                                                               | ** ** |
| Investment securities available for sale      |       | $         | 37,814     |                                                                         | $          | —                                                                        |       | $                                                                  | 37,814     |   | $ | — |   |
| Mortgage backed securities available for sale |       | 31,921    |       | —                                                                       |       | 31,921                                                                        |       | —                                                             |       |
| Total                                         |       | $         | 69,735     |                                                                         | $          | —                                                                        |       | $                                                                  | 69,735     |   | $ | — |   |

 

Forassets measured at fair value on a nonrecurring basis, the fair valuemeasurements by level within the fair value hierarchy used at December 31,2008 are as follows:

 
| **Description** | ** ** | **Total** | ** ** | **(Level 1) Quoted  Prices in Active  Markets for  Identical Assets** | ** ** | **(Level 2)  Significant  Other  Observable  Inputs** | ** ** | **(Level 3)********Significant********Unobservable Inputs** | ** ** |
|-----------------|------------|-----------|------------|-----------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------------|------------|
|            |       |      |       |                                                                  |       |                                                  |       |                                                        |       |
| Impaired loans  |       | $         | 2,619      |                                                                  | $          | —                                                |       | $                                                           | —     |   | $ | 2,619 |   |
|                 |            |           |            |                                                                       |            |                                                       |            |                                                             |            |  |  |  |  |

 

Theamounts and estimated fair values of the Company’s financial instruments wereas follows at December 31, 2009 and 2008.

 
| ** **                                    | ** ** | **2009**                | ** ** | **2008**            | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|---------------------|------------|
| ** **                                    | ** ** | **Carrying**            | ** ** | **Estimated**       | ** ** | **Carrying** | ** ** | **Estimated** | ** ** |
| ** **                                    | ** ** | **Amount**              | ** ** | **Fair Value** | ** ** | **Amount** | ** ** | **Fair Value** | ** ** |
| ** **                                    | ** ** | **(In thousands)** | ** ** |
| Assets:                                       |       |                    |       |                |       |   |   |   |   |
| Cash and due from banks                       | ** ** | **$**                   | **5,710**  | ** **          | **$**      | **5,710** |   | $ | 7,849 |   | $ | 7,849 |   |
| Interest bearing deposits at banks            | ** ** | **69,226**              | ** ** | **69,226**          |       | 20,459 |   | 20,459 |   |
| Investment securities                         | ** ** | **52,336**              | ** ** | **52,686**          |       | 62,070 |   | 61,773 |   |
| Mortgage-backed securities                    | ** ** | **23,355**              | ** ** | **23,355**          |       | 31,921 |   | 31,921 |   |
| Loans receivable                              | ** ** | **285,008**             | ** ** | **285,105**         |       | 278,437 |   | 275,903 |   |
| FHLB stock                                    | ** ** | **2,439**               | ** ** | **2,439**           |       | 2,439 |   | 2,439 |   |
| Accrued interest receivable                   | ** ** | **2,045**               | ** ** | **2,045**           |       | 2,028 |   | 2,028 |   |
|                                          |       |                    |       |                |       |   |   |   |   |
| Liabilities:                                  |       |                    |       |                |       |   |   |   |   |
| NOW and MMDA deposits (1)                     | ** ** | **$**                   | **70,342** | ** **          | **$**      | **70,342** |   | $ | 84,380 |   | $ | 84,380 |   |
| Other savings deposits                        | ** ** | **40,892**              | ** ** | **40,892**          |       | 39,378 |   | 39,378 |   |
| Certificate accounts                          | ** ** | **251,583**             | ** ** | **253,534**         |       | 207,943 |   | 210,852 |   |
| FHLB advances & other borrowed money | ** ** | **32,021**              | ** ** | **32,960**          |       | 37,198 |   | 39,199 |   |
| Accrued interest payable                      | ** ** | **192**                 | ** ** | **192**             |       | 220 |   | 220 |   |
| Off balance sheet instruments                 |       | —                  |       | —              |       | — |   | — |   |

 

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(1) Includes non-interest bearing accounts, totaling $15,056 and$13,609 at December 31, 2009 and 2008, respectively.

 

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

 

**CONDENSED BALANCE SHEETS**

 
| ** **                                          | ** ** | **December 31,** | ** **     |
|-----------------------------------------------------|------------|-----------------------|----------------|
| ** **                                          | ** ** | **2009**              | ** **     | **2008** | ** ** |
| **ASSETS:**                                         | ** ** | ** **            | ** **     | ** ** | ** ** |
| Cash and cash equivalents                           | ** ** | **$**                 | **1,596,689**  |   | $ | 3,770,669 |   |
| Loan receivable — ESOP                         | ** ** | **616,177**           |           | 722,664 |   |
| Other assets                                        | ** ** | **—**            |           | 3,600 |   |
| Investment in Alliance Bank                         | ** ** | **46,231,757**        |           | 44,419,105 |   |
| Total assets                                        | ** ** | **$**                 | **48,444,623** |   | $ | 48,916,038 |   |
| ** **                                          | ** ** | ** **            |           |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**       | ** ** | ** **            |           |   |   |
| **LIABILITIES:**                                    | ** ** | ** **            |           |   |   |
| Total liabilities                                   | ** ** | **$**                 | **—**     |   | $ | 17,000 |   |
| ** **                                          | ** ** | ** **            |           |   |   |
| **STOCKHOLDERS’ EQUITY**                       | ** ** | ** **            |           |   |   |
| Total stockholders’ equity                     | ** ** | **48,444,623**        |           | 48,899,038 |   |
|                                                | ** ** | ** **            |           |   |   |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY** | ** ** | **$**                 | **48,444,623** |   | $ | 48,916,038 |   |

 

**CONDENSED INCOME STATEMENTS**

 
| ** **                                                                                   | ** ** | **For the  Year Ended**     | ** **    |
|----------------------------------------------------------------------------------------------|------------|-----------------------------|---------------|
| ** **                                                                                   | ** ** | **December 31,  2009** | ** **    | **December 31,  2008** | ** ** |
| **INCOME:**                                                                                  | ** ** | ** **                  | ** **    | ** ** | ** ** |
| Interest income                                                                              | ** ** | **$**                       | **56,381**    |   | $ | 68,862 |   |
| Total income                                                                                 | ** ** | **56,381**                  |          | 68,862 |   |
| ** **                                                                                   | ** ** | ** **                  |          |   |   |
| **EXPENSES:**                                                                                | ** ** | ** **                  |          |   |   |
| Legal Fees                                                                                   | ** ** | **24,000**                  |          | 32,000 |   |
| Stock Related Expense                                                                        | ** ** | **31,600**                  |          | 36,500 |   |
| Capital stock tax                                                                            | ** ** | **1,000**                   |          | 11,000 |   |
| Total expenses                                                                               | ** ** | **56,600**                  |          | 79,500 |   |
|                                                                                         | ** ** | ** **                  |          |   |   |
| **LOSS BEFORE INCOME TAXES (BENEFIT) AND EQUITY IN  UNDISTRUBUTED NET INCOME OF SUBSIDIARY** | ** ** | **(219**                    | **)**         | (10,638 | ) |
| ** **                                                                                   | ** ** | ** **                  |          |   |   |
| **EQUITY IN UNDISTRUBUTED NET INCOME OF SUBSIDIARY**                                         | ** ** | **1,358,916**               |          | 611,672 |   |
| ** **                                                                                   | ** ** | ** **                  |          |   |   |
| **Income Tax Benefit**                                                                       | ** ** | **—**                  |          | (3,600 | ) |
|                                                                                         | ** ** | ** **                  |          |   |   |
| **NET INCOME**                                                                               | ** ** | **$**                       | **1,358,697** |   | $ | 604,634 |   |

 

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**CONDENSED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                    | ** ** | **For the  Year Ended**     | ** **    |
|-------------------------------------------------------------------------------|------------|-----------------------------|---------------|
| ** **                                                                    | ** ** | **December 31,  2009** | ** **    | **December 31,  2008** | ** ** |
| **OPERATING ACTIVITIES:**                                                     | ** ** | ** **                  | ** **    | ** ** | ** ** |
|                                                                          | ** ** | ** **                  | ** **    | ** ** | ** ** |
| Net Income                                                                    | ** ** | **$**                       | **1,358,697** |   | $ | 604,634 |   |
| Adjustments to reconcile net income to cash provided by (used in) operations: | ** ** | ** **                  |          |   |   |
| Undistributed net income of subsidiary                                        | ** ** | **(1,358,916**              | **)**         | (611,672 | ) |
| Decrease (increase) in other assets                                           | ** ** | **3,600**                   |          | (3,600 | ) |
| (Decrease) increase in other liabilities                                      | ** ** | **(17,000**                 | **)**         | 17,000 |   |
| Net cash (used in) provided by operating activities                           | ** ** | **(13,619**                 | **)**         | 6,362 |   |
|                                                                          | ** ** | ** **                  |          |   |   |
| **INVESTING ACTIVITIES:**                                                     | ** ** | ** **                  |          |   |   |
| ** **                                                                    | ** ** | ** **                  |          |   |   |
| Principal repayments on ESOP loan                                             | ** ** | **106,487**                 |          | 120,444 |   |
| Net cash provided by investing activities                                     | ** ** | **106,487**                 |          | 120,444 |   |
|                                                                          | ** ** | ** **                  |          |   |   |
| **FINANCING ACTIVITIES:**                                                     | ** ** | ** **                  |          |   |   |
|                                                                          | ** ** | ** **                  |          |   |   |
| Purchase of treasury stock                                                    | ** ** | **(1,919,112**              | **)**         | (2,385,979 | ) |
| Dividends paid                                                                | ** ** | **(347,736**                | **)**         | (743,168 | ) |
| Net cash used in financing activities                                         | ** ** | **(2,266,848**              | **)**         | (3,129,147 | ) |
|                                                                          | ** ** | ** **                  |          |   |   |
| Net decrease in cash and cash equivalents                                     | ** ** | **(2,173,980**              | **)**         | (3,002,341 | ) |
| Cash and cash equivalents — beginning of period                          | ** ** | **3,770,669**               |          | 6,773,010 |   |
|                                                                          | ** ** | ** **                  |          |   |   |
| Cash and cash equivalents — end of period                                | ** ** | **$**                       | **1,596,689** |   | $ | 3,770,669 |   |

 

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

 

The information required herein is incorporated byreference to the Company’s definitive proxy statement for the annual meeting ofstockholders to be held April 28, 2010. (“Definitive Proxy Statement”).

 

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

 

a)              Under thesupervision and with the participation of the Company’s management, includingits Chief Executive Officer and Chief Financial Officer, the Company hasevaluated the effectiveness of the design and operation of its disclosurecontrols and procedures (as defined in Rule 13a-15(e) and 15d-15(e) underthe Exchange Act) as of December 31, 2009. Based on such evaluation, theCompany’s Chief Executive Officer and Chief Financial Officer have concludedthat these controls and procedures are designed to ensure that the informationrequired to be disclosed by the Company in reports that it files or submitsunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and regulations and areoperating in an effective manner.

 

b)             Management’sReport on Internal Control Over Financial Reporting

 

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

 

Internal control over financial reporting is designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements prepared for external purposes inaccordance with generally accepted accounting principles. Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

Under the supervision and with the participation of management,including our principal executive officer and principal financial officer, weconducted an evaluation of the effectiveness of our internal control overfinancial reporting based on the framework in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission. Based on our evaluation under the framework in InternalControl—Integrated Framework, management concluded that our internal controlover financial reporting was effective as of December 31, 2009.

 

This Annual Report does not include an attestation report of theCompany’s registered public accounting firm regarding internal control overfinancial reporting. Management’s report was not subject to attestation by theCompany’s registered public accounting firm pursuant to temporary rules ofthe Securities and Exchange Commission that permit the Company to provide onlymanagement’s report in this Annual Report.

 

c)              No change inthe Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and15d- 15(f) under the Exchange Act) occurred during the fourth fiscalquarter of fiscal 2009 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

**Item 9B.  Other Information.**

 

Not applicable.

 

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**PART III.**

 

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

 

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

 

**Item 11.  Executive Compensation.**

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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**PART IV.**

 

**Item15.  Exhibits and Financial StatementSchedules.**

 

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

 
|   | Report of Independent Registered Public Accounting  Firm.                                                             |
|--------|-----------------------------------------------------------------------------------------------------------------------|
|   | Consolidated Statements of Financial Condition at  December 31, 2009 and 2008.                                   |
|   | Consolidated Statements of Income for the years ended  December 31, 2009 and 2008.                               |
|   | Consolidated Statements of Changes in Stockholders’  Equity for the years ended December 31, 2009 and 2008. |
|   | Consolidated Statements of Cash Flows for the years  ended December 31, 2009 and 2008.                           |
|   | Notes to Consolidated Financial Statements.                                                                           |

 

(2) Allschedules are omitted because of the absence of conditions under which they arerequired or because the required information is included in the financialstatements and related notes thereto.

 

(3) Thefollowing exhibits are filed as part of this Form 10-K and this listincludes the Exhibit Index.

 
| **No** | ** ** | **Description**                                                                                                      |
|--------|------------|----------------------------------------------------------------------------------------------------------------------|
| 3.1    |       | Federal Stock Charter of Alliance Bancorp, Inc.  of Pennsylvania*                                               |
| 3.2    |       | Amended and Restated Bylaws of Alliance  Bancorp, Inc. of Pennsylvania**                                        |
| 4.1    |       | Form of Stock Certificate of Alliance  Bancorp, Inc. of Pennsylvania*                                      |
| 10.1   |       | Alliance Mutual Holding Company Amended and Restated  Directors Retirement Plan***                                   |
| 10.2   |       | Alliance Bank Amended and Restated Supplemental  Executive Retirement Plan and Participation Agreement***            |
| 10.3   |       | Greater Delaware Valley Savings d/b/a Alliance Bank  Endorsement Split Dollar Insurance Agreement*                   |
| 10.4   |       | Amended and Restated Employment Agreement, dated  May 21, 2008, between Alliance Bank and Dennis D. Cirucci**** |
| 10.5   |       | Amended and Restated Employment Agreement, dated  May 21, 2008, between Alliance Bank and Peter J. Meier****    |
| 10.6   |       | Amended and Restated Employment Agreement, dated  May 21, 2008, between Alliance Bank and Suzanne J. Ricci****  |
| 21.1   |       | Subsidiaries – Referenced is made to Item 1.  Business – Subsidiaries.                                     |
| 23.1   |       | Consent of ParenteBeard LLC                                                                                          |
| 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                                                       |

 

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| *      |   | Incorporated herein by reference from the Company’s  Registration Statement on Form S-1 (File No. 333-136853) filed with  the Securities and Exchange Commission filed on August 23, 2006, as  amended. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                        |
| **     |   | Incorporated herein by reference from the Company’s  Current Report on Form 8-K filed with the Securities and Exchange  Commission on December 19, 2007.                                                     |
|   |   |                                                                                                                                                                                                                        |
| ***    |   | Incorporated herein by reference from the Company’s  Current Report on Form 8-K filed with the Securities and Exchange  Commission on December 18, 2008.                                                     |
|   |   |                                                                                                                                                                                                                        |
| ****   |   | Incorporated herein by reference from the Company’s  Current Report on Form 8-K filed with the Securities and Exchange  Commission on May 23, 2008.                                                          |

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

 
|                       | **ALLIANCE BANCORP, INC, OF  PENNSYLVANIA** |
|----------------------------|---------------------------------------------|
|                       |                                        |   |
| Dated: March 25, 2010 |                                        | By: | /s/ Dennis D. Cirucci |
|                       |                                        | Dennis D. Cirucci |
|                       |                                        | President and |
|                       |                                        | Chief Executive Officer |

 

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 

 
| /s/Dennis D. Cirucci                                 |   |           |
|------------------------------------------------------|--------|----------------|
| Dennis D. Cirucci                                    |   |           |
| President and Chief Executive Officer                |   | March 25, 2010 |
| (Principal Executive Officer)                        |   |           |
|                                                 |   |           |
|                                                 |   |           |
| /s/Peter J. Meier                                    |   |           |
| Peter J. Meier                                       |   | March 25, 2010 |
| Executive Vice President and Chief Financial Officer |   |           |
| (Principal Financial and Accounting Officer)         |   |           |
|                                                 |   |           |
|                                                 |   |           |
| /s/William E. Hecht                                  |   |           |
| William E. Hecht                                     |   | March 25, 2010 |
| Chairman of the Board                                |   |           |
|                                                 |   |           |
|                                                 |   |           |
| /s/J. William Cotter, Jr.                            |   |           |
| J. William Cotter, Jr.                               |   | March 25, 2010 |
| Director                                             |   |           |
|                                                 |   |           |
|                                                 |   |           |
| /s/John A. Raggi                                     |   |           |
| John A. Raggi                                        |   | March 25, 2010 |
| Director                                             |   |           |

 

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| /s/Philip K. Stonier  |   |           |
|-----------------------|--------|----------------|
| Philip K. Stonier     |   | March 25, 2010 |
| Director              |   |           |
|                  |   |           |
|                  |   |           |
| /s/James S. Carr      |   |           |
| James S. Carr         |   | March 25, 2010 |
| Director              |   |           |
|                  |   |           |
|                  |   |           |
| /s/G. Bradley Rainer  |   |           |
| G. Bradley Rainer     |   | March 25, 2010 |
| Director              |   |           |
|                  |   |           |
|                  |   |           |
| /s/R. Cheston Woolard |   |           |
| R. Cheston Woolard    |   | March 25, 2010 |
| Director              |   |           |
|                  |   |           |
|                  |   |           |
| /s/Timothy E. Flatley |   |           |
| Timothy E. Flatley    |   | March 25, 2010 |
| Director              |   |           |

 

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