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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

| **x**                                                                                                                                                                                                                                                                                       | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT  OF 1934**     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| **For the  fiscal year ended December 31, 2008**                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                        |
| **OR**                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                        |       |                                                                                                     |
| **o**                                                                                                                                                                                                                                                                                       | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| **For the  transition period from                        to                      ** |

 

**CommissionFile No.:  001-33189**

 

**ALLIANCE BANCORP, INC. OF PENNSYLVANIA**

(Exact name ofregistrant 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’stelephone number, including area code: ** (610) 353-2900**

 

Securitiesregistered 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 |

 

Securitiesregistered pursuant to Section 12(g) of the Act: **NotApplicable**

 

Indicate by check mark if the Registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act. Yes oNo x

 

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

 

Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports),  and (2) has been subject to such filingrequirements for the past 90 days. Yes xNo o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 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 informationstatements incorporated by reference in Part  III of this Form  10-Kor any amendment to this Form 10-K. x

 

Indicate by check mark whether the Registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definition of “accelerated filer”, “large accelerated filer”,and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone): Non-accelerated filer  oSmaller Reporting Company  xLarge accelerated filer   oAccelerated filer  o

 

Indicate by check mark whether the Registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes oNo x

 

As of June 30, 2008, the aggregate value of the 2,876,023 sharesof Common Stock of the Registrant issued and outstanding on such date, whichexcludes 3,973,750 shares held by the Registrant’s mutual holding company,Alliance Mutual Holding Company, and 375,227 shares held by all directors andofficers of the Registrant and the Registrant’s Employee Stock Ownership Plan (“ESOP”)as a group, and treasury shares was approximately $23.7 million.  This figure is based on the last known tradeprice of $8.99 per share of the Registrant’s Common Stock on June 30,2008.  Although directors and officersand the ESOP were assumed to be “affiliates” of the Registrant for purposes ofthis calculation, the classification is not to be interpreted as an admissionof such status.

 

The number of shares outstanding of Common Stock of the Registrant asof March 9, 2009, was 6,917,676.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

(1)                                  Portionsof the definitive proxy statement for the Annual Meeting of Stockholders to beheld April 22, 2009 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                                                                                                       | 32       |
|           | Item 3      | Legal Proceedings                                                                                                | 32       |
|           | Item  4     | Submission  of Matters to a Vote of Security Holders                                                             | 32       |
|           |        |                                                                                                             |     |
| PART II:  | Item  5     | Market for  the Registrant’s Common Equity, Related Stockholder Matters and Purchases of  Equity Securities | 33       |
|           | Item 6      | Selected  Financial Data                                                                                         | 33       |
|           | Item  7     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                      | 35       |
|           | Item  8     | Financial  Statements and Supplementary Data                                                                     | 45       |
|           | Item  9     | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                            | 74       |
|           | Item  9A(T) | Controls and  Procedures                                                                                         | 74       |
|           | Item 9B     | Other Information                                                                                                | 74       |
|           |        |                                                                                                             |     |
| PART III: | Item  10    | Directors,  Executive Officers and Corporate Governance                                                          | 74       |
|           | Item 11     | Executive  Compensation                                                                                          | 74       |
|           | Item  12    | Security  Ownership of Certain Beneficial Owners and Management and Related  Stockholder Matters            | 74       |
|           | Item  13    | Certain  Relationships and Related Transactions, and Director Independence                                       | 74       |
|           | Item  14    | Principal  Accounting Fees and Services                                                                          | 74       |
|           |        |                                                                                                             |     |
| PART IV:  | Item  15    | Exhibits and  Financial Statements Schedules                                                                     | 75       |
|           |        |                                                                                                             |     |
| SIGNATURES     |        |                                                                                                             | 76       |

 

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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. Each share of the Bank’s common stock was converted into 2.09945 sharesof the Company’s common stock.  Theoffering resulted in approximately $16.5 million in net proceeds to theCompany.  The significant asset of theCompany is the capital stock of the Bank.

 

We operate a total ofnine banking offices located in Delaware and Chester Counties, which aresuburbs 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, 2008, we had $424.1million of total assets, $331.7 million of total deposits and stockholders’equity of $48.9 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.

 

Through an extensive highway network, the economies of Delaware andChester Counties are knitted tightly into a regional economy of more than 2.5million workers. Delaware and Chester Counties have a large, well-educated, andskilled labor force, with nearly one quarter of the counties’ population havingearned a four-year college degree. The median household income of Delaware andChester Counties in 2007 was approximately $60,232 and $83,146, respectively,as compared to approximately $48,576 for Pennsylvania as a whole. In addition,Philadelphia’s central location in the Northeast corridor, infrastructure, andother factors have made the Bank’s primary market area attractive to many largecorporate employers, including Comcast, Boeing, State Farm Insurance, UnitedParcel Service, PECO Energy, SAP America, 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, Mercy Health Corp., and Astra-Zeneca are amongthe larger health care employers within the Bank’s market area. According tothe Delaware County Chamber of Commerce, there are more than 65 degree-grantinginstitutions in the Delaware Valley region, representing a higher density ofcolleges and universities than any other area in the United States.

 

The population of Delaware County is reported at over half a millionresidents and is the fifth most populated county in the Commonwealth ofPennsylvania. Much of the growth and development continues to be in the westernpart of the county and in adjacent Chester County. At September 30, 2008, theunemployment rate in Delaware County was at 5.2%; however, in Chester Countythe rate was even lower, at 4.1%. This is as compared to the rate for theentire Commonwealth, which also stood at 5.2% as of September 30, 2008. ChesterCounty’s growth rate is expected to increase even further in the next decade,and some of the communities in Chester County that are experiencing the mostrapid growth — East Marlborough Township, New Garden Township and East Goshen —surround the Bank’s Chester County branch.

 

We face significant competition in originating loans and attractingdeposits.  This competition stemsprimarily from 

 

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commercial banks, other savings banks and savings associations andmortgage-banking companies.  There aremore than 350 financial institution branches located in Delaware and Chester Counties(not including credit unions).  Many ofthe financial service providers operating in our market area are significantlylarger, and have greater financial resources, than us.  We face additional competition for depositsfrom short-term money market funds and other corporate and governmentsecurities funds, mutual funds and from other non-depository financialinstitutions such as brokerage firms and insurance companies.

 

**LendingActivities**

 

**General.**  At December 31, 2008, the Bank’s totalportfolio of loans receivable amounted to $281.6 million, or 66.4%, of the Bank’s$424.1 million of total assets at such time. The Bank has traditionally concentrated its lending activities on firstmortgage loans secured by residential property. However, over the past several years, the Bank has placed an emphasis onloans secured by commercial real estate properties.  Consistent with such approach, commercialreal estate loans amounted to $123.5 million or 43.8% of the total loanportfolio at December 31, 2008.  To asignificantly lesser extent, the Bank also originates multi-family loans, landand construction loans, consumer loans and commercial business loans.  At December 31, 2008, such loancategories amounted to $1.3 million, $25.3 million, $5.9 million and $9.0million, respectively, or 0.5%, 9.0%, 2.1% and 3.2% of the total loanportfolio, 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, 2008, the Bank’s commercial realestate loans increased by $762,000 or 0.6% to $123.5 million. For the yearended December 31, 2008, the Bank’s single-family mortgage loans increasedby $5.2 million or 4.7% to $116.7 million.

 

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

 
|                        |   | **December 31,**                |       |
|-----------------------------|--------|--------------------------------------|------------|
|                        |   | **2008**                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                        |   | **Amount**                           | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** |   |
|                        |   | **(Dollars in Thousands)** |       |
| Real estate  loans:         |   |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Single-family  (1) (2) |   | $                                    | 116,683    |   | 41.43 | % | $ | 111,499 |   | 42.92 | % | $ | 108,551 |   | 45.48 | % | $ | 104,020 |   | 45.79 | % | $ | 88,128 |   | 41.74 | % |
| Multi-family                |   | 1,282                                |       | 0.46 |   | 1,673 |   | 0.64 |   | 2,088 |   | 0.87 |   | 2,221 |   | 0.98 |   | 2,488 |   | 1.17 |   |
| Commercial                  |   | 123,465                              |       | 43.84 |   | 122,703 |   | 47.24 |   | 108,339 |   | 45.39 |   | 105,687 |   | 46.53 |   | 104,444 |   | 48.44 |   |
| Land and  construction: (3) |   |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                 |   | 16,372                               |       | 5.81 |   | 6,034 |   | 2.32 |   | 6,700 |   | 2.81 |   | 3,520 |   | 1.55 |   | 4,244 |   | 1.99 |   |
| Commercial                  |   | 8,889                                |       | 3.16 |   | 8,557 |   | 3.29 |   | 5,074 |   | 2.13 |   | 3,876 |   | 1.71 |   | 4,833 |   | 2.26 |   |
| Total real  estate loans    |   | 266,691                              |       | 94.70 |   | 250,466 |   | 96.41 |   | 230,752 |   | 96.68 |   | 219,324 |   | 96.55 |   | 204,137 |   | 95.60 |   |
|                        |   |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consumer:                   |   |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Student                     |   | 5,455                                |       | 1.94 |   | 1,782 |   | 0.69 |   | 1,779 |   | 0.75 |   | 2,440 |   | 1.07 |   | 2,946 |   | 1.38 |   |
| Savings account             |   | 430                                  |       | 0.15 |   | 477 |   | 0.18 |   | 561 |   | 0.24 |   | 566 |   | 0.25 |   | 633 |   | 0.30 |   |
| Other                       |   | 51                                   |       | 0.02 |   | 109 |   | 0.04 |   | 103 |   | 0.04 |   | 88 |   | 0.04 |   | 57 |   | 0.03 |   |
| Total consumer  loans       |   | 5,936                                |       | 2.11 |   | 2,368 |   | 0.91 |   | 2,443 |   | 1.02 |   | 3,094 |   | 1.36 |   | 3,756 |   | 1.77 |   |
|                        |   |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial  business loans  |   | 8,985                                |       | 3.19 |   | 6,924 |   | 2.68 |   | 5,485 |   | 2.30 |   | 4,745 |   | 2.09 |   | 5,754 |   | 2.69 |   |
|                        |   |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total loans  receivable     |   | 281,612                              |       | 100.00 | % | 259,758 |   | 100.00 | % | 238,680 |   | 100.00 | % | 227,163 |   | 100.00 | % | 213,527 |   | 100.00 | % |
|                        |   |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Less:                       |   |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred costs  (fees)      |   | 6                                    |       |   |   | (5 | ) |   |   | 75 |   |   |   | 199 |   |   |   | 642 |   |   |   |
| Allowance for  loan losses  |   | 3,169                                |       |   |   | 2,831 |   |   |   | 2,719 |   |   |   | 2,670 |   |   |   | 2,608 |   |   |   |
|                        |   |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans  receivable, net      |   | $                                    | 278,437    |   |   |   | $ | 256,932 |   |   |   | $ | 235,886 |   |   |   | $ | 224,294 |   |   |   | $ | 210,277 |   |   |   |

 

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(1) At December 31,2008, 2007, 2006, 2005, and 2004, includes $-0-, $-0-, $125,000, $-0-, and$565,000 of loans classified as held for sale, respectively.

 

(2) At December 31,2008, 2007, 2006, 2005, and 2004, includes $25.6 million, $29.5 million, $28.9million, $22.8 million, and $21.2 million, respectively, of home equity loansand lines.

 

(3) AtDecember 31, 2008, 2007, 2006, 2005, and 2004, excludes $15.3 million,$10.8 million, $9.7 million, $2.9 million, and $5.4 million, respectively, ofundisbursed funds on land and construction loans.

 

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**Contractual Maturities**.  The following table sets forth the scheduledcontractual maturities of the Bank’s loans receivable at December 31,2008.  Demand loans, loans having nostated schedule of repayments and no stated maturity and overdraft loans arereported as due in one year or less. Adjustable-rate loans are reported on a contractual basis rather than ona repricing basis.  The amounts shown foreach period do not take into account loan prepayments and normal amortizationof the Bank’s loan portfolio.

 
|                                                |   | **Real Estate Loans** |       |             |       |           |       |                            |       |
|-----------------------------------------------------|--------|---------------------------------|------------|------------------|------------|----------------|------------|---------------------------------|------------|
|                                                |   | **Single-family**               | ** ** | **Multi-family** | ** ** | **Commercial** | ** ** | **Land and  Construction** | ** ** | **Consumer  and Other  Loans** | ** ** | **Commercial  Business Loans** | ** ** | **Total** |   |
|                                                |   | **(In Thousands)**         |       |
| Amounts due in:                                     |   |                            |       |             |       |           |       |                            |       |   |   |   |   |   |   |
| One year or less                                    |   | $                               | 912        |             | $          | 156            |       | $                               | 9,753      |   | $ | 25,261 |   | $ | 25 |   | $ | 1,331 |   | $ | 37,438 |   |
| After one year  through three years                 |   | 2,045                           |       | 1,029            |       | 10,191         |       | —                          |       | 164 |   | 1,183 |   | 14,612 |   |
| After three  years through five years               |   | 5,964                           |       | —           |       | 20,372         |       | —                          |       | 232 |   | 2,150 |   | 28,718 |   |
| After five years  through fifteen years             |   | 34,167                          |       | —           |       | 47,862         |       | —                          |       | 5,450 |   | 1,176 |   | 88,655 |   |
| Over fifteen  years                                 |   | 73,595                          |       | 97               |       | 35,287         |       | —                          |       | 65 |   | 3,145 |   | 112,189 |   |
| Total (1)                                           |   | $                               | 116,683    |             | $          | 1,282          |       | $                               | 123,465    |   | $ | 25,261 |   | $ | 5,936 |   | $ | 8,985 |   | $ | 281,612 |   |
|                                                |   |                            |       |             |       |           |       |                            |       |   |   |   |   |   |   |
| Interest rate  terms on amounts due after one year: |   |                            |       |             |       |           |       |                            |       |   |   |   |   |   |   |
| Fixed                                               |   | $                               | 46,912     |             | $          | 1,126          |       | $                               | 40,343     |   | — |   | — |   | $ | 4,509 |   | $ | 92,890 |   |
| Adjustable                                          |   | $                               | 68,859     |             | —     |           | $          | 73,369                          |       | — |   | $ | 5,911 |   | $ | 3,145 |   | $ | 151,284 |   |

 

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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,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                 | ** ** | **(In Thousands)**                    | ** ** |
|                                       |       |                                       |       |   |   |   |   |
| Real estate loan  originations:            |       |                                       |       |   |   |   |   |
| Single-family  (1)                         |       | $                                          | 24,541     |   | $ | 28,601 |   | $ | 33,660 |   |
| Multi-family                               |       | 120                                        |       | 980 |   | 640 |   |
| Commercial                                 |       | 26,873                                     |       | 32,913 |   | 21,073 |   |
| Land and  construction:                    |       |                                       |       |   |   |   |   |
| Residential                                |       | 4,525                                      |       | 6,770 |   | 6,208 |   |
| Commercial                                 |       | 6,536                                      |       | 2,828 |   | 6,782 |   |
| Total real  estate loan originations       |       | 62,595                                     |       | 72,092 |   | 68,363 |   |
|                                       |       |                                       |       |   |   |   |   |
| Consumer  originations:                    |       |                                       |       |   |   |   |   |
| Student                                    |       | 4,202                                      |       | 582 |   | 482 |   |
| Savings account                            |       | 310                                        |       | 330 |   | 433 |   |
| Other                                      |       | 4                                          |       | 7 |   | 24 |   |
| Total consumer  loan originations          |       | 4,516                                      |       | 919 |   | 939 |   |
|                                       |       |                                       |       |   |   |   |   |
| Commercial  business originations          |       | 1,475                                      |       | 3,909 |   | 2,820 |   |
| Total loan  originations                   |       | 68,586                                     |       | 76,920 |   | 72,122 |   |
|                                       |       |                                       |       |   |   |   |   |
| Purchase of real  estate loans:            |       |                                       |       |   |   |   |   |
| Single-family                              |       | —                                     |       | — |   | — |   |
| Multi-family                               |       | —                                     |       | — |   | — |   |
| Residential  construction                  |       | —                                     |       | — |   | — |   |
| Commercial                                 |       | 175                                        |       | 113 |   | 3,649 |   |
| Commercial  construction                   |       | 6,300                                      |       | — |   | — |   |
| Total real  estate loan purchases          |       | 6,475                                      |       | 113 |   | 3,649 |   |
| Total loan  originations and purchases (2) |       | 75,061                                     |       | 77,033 |   | 75,771 |   |
|                                       |       |                                       |       |   |   |   |   |
| Less:                                      |       |                                       |       |   |   |   |   |
| Principal loan  repayments                 |       | (51,643                                    | )          | (51,002 | ) | (61,814 | ) |
| Loans and  participations sold             |       | (1,335                                     | )          | (4,762 | ) | (2,319 | ) |
| Other, net (3)                             |       | (578                                       | )          | (223 | ) | (46 | ) |
|                                       |       |                                       |       |   |   |   |   |
| Net increase                               |       | $                                          | 21,505     |   | $ | 21,046 |   | $ | 11,592 |   |

 

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(1)          Includes $5.1 million,$9.9 million and $19.3 million of home equity loans and lines of creditoriginated during the years ended December 31, 2008, 2007 and 2006,respectively.

 

(2)          Includes originations ofloans held for sale and subsequently sold in the secondary market.

 

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

 

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

 

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

 

The Bank’ssingle-family loan originations amounted to $24.5 million and $28.6 millionduring 2008 and 2007, respectively.  Whenpossible, the Bank emphasizes the origination of single-family residentialadjustable-rate mortgage loans (“ARMs”). Originations of such loans amounted to $8.5 million or 34.7% and $12.6million or 44.1% of single-family residential real estate loan originationsduring 2008 and 2007, respectively.  TheBank also originates fixed-rate single-family residential real estate loanswith terms of five, ten, twelve, 15 and 30 years.  Generally, fixed-rate residential mortgageloans with terms greater than 15 years have been originated pursuant tocommitments to sell such loans to correspondent mortgage-banking institutionsin order to reduce the proportion of the Bank’s loan portfolio comprised ofsuch assets and reduce interest rate risk. Loans are sold without any recourse to the Bank by the purchaser in theevent of default on the loan by the borrower and are sold with servicingreleased.  The Bank sold $1.4 million and$4.7 million of long-term (generally over 15 years) fixed-rate residentialloans during 2008 and 2007, respectively. Such loan sales were conducted in furtherance of the Bank’sasset/liability strategies. At December 31, 2008 and December 31,2007 there were no loans held for sale.

 

In accordance withthe Bank’s increased emphasis on commercial real estate loan originations, suchoriginations amounted to $33.2 million and $32.9 million during 2008 and 2007,respectively.  In addition, land andconstruction loan originations amounted to $11.1 million and $9.5 millionduring 2008 and 2007, 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, 2008 and 2007, the Bank’ssingle-family loan portfolio included $24.1 million or 20.6% and $23.6 millionor 21.1%, respectively, of such subprime loans. The Bank reported $1.9 million or 7.9% and $1.8 million or 7.6% of theseloans as non-performing at December 31, 2008 and December 31, 2007,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.

 

Historically, theBank has not been an active purchaser of loans. The Bank purchased $6.5 million and $113,000 during 2008 and 2007,respectively, of real estate loans, most of which are located outside of itsprimary lending area.  As of December 31,2008, the outstanding balance of such loans included $1.8 million, $253,000,$2.1 million and $8.4 million secured by single-family, multi-family,commercial and construction real estate properties, respectively.  At December 31, 2008, $117,000 of theseloans were reported as non-performing.

 

**Single-FamilyResidential Real Estate Loans**.  The Bank has historically concentrated itslending activities on the origination of loans secured primarily by firstmortgage liens on existing single-family residences and intends to continue tooriginate permanent loans secured by first mortgage liens on single-familyresidential properties in the future. At December 31, 2008, $116.7 millionor 41.4% of the Bank’s total loan portfolio consisted of single-familyresidential real estate loans.  Of the$116.7 million of such loans at December 31, 2008, $68.9 million or 59.0%had adjustable rates of interest and $47.8 million or 41.0% had fixed rates ofinterest.

 

The Bank’s ARMs typically provide for an interest rate which adjustsevery year after an initial period of three, five, seven or ten years inaccordance with a designated index (the national monthly median cost of fundsor the weekly average yield on U.S. Treasury securities adjusted to a constantcomparable maturity of one year) plus a margin. Such loans are typically based on a 30-year amortization schedule.  The amount of any increase or decrease in theinterest rate is presently limited to 2% per year, with a limit of 6% over thelife of the loan.  The Bank’sadjustable-rate loans currently being originated are not assumable.  The Bank has not engaged in the practice ofusing a cap on the payments that could allow the loan balance to increaserather than decrease, resulting in negative amortization.  The adjustable-rate loans offered by theBank, like many other financial institutions, provide for initial rates of interestbelow the rates which would prevail when the index used for repricing isapplied.  However, the Bank underwritesthe loan on the basis of the borrower’s ability to pay at the initial ratewhich would be in effect without the discount. Although the Bank 

 

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continues to emphasize ARMs, such loan products have not been asattractive due to the lower interest rate environment which has recentlyprevailed and the decrease in the spread between the rates offered on fixed andadjustable rate loans.

 

Adjustable-rateloans decrease the risks associated with changes in interest rates but involveother risks, primarily because as interest rates rise, the payment by theborrower rises to the extent permitted by the terms of the loan, therebyincreasing the potential for default.  Atthe same time, the marketability of the underlying property may be adverselyaffected by higher interest rates.  TheBank believes that these risks, which have not had a material adverse effect onthe Bank to date, generally are less than the risks associated with holdingfixed-rate loans in an increasing interest rate environment.

 

Due to competitivemarket pressures, the Bank has continued to originate fixed-rate mortgage loanswith terms up to 30 years. Substantially all of the Bank’s fixed-rate loanswith terms of over 15 years are originated pursuant to commitments to sell suchloans to correspondent mortgage banking institutions.  Fixed-rate loans with terms of 15 years orless are generally originated for portfolio. In addition, while the Bank offers balloon loans with five, seven andten year terms based on a 20 to 30 year amortization schedule, the Bank hasonly originated a small amount of such 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, 2008, theBank held a first lien on a majority of the properties securing home equityloans from the Bank. The Bank has placed an increased emphasis on home equityloans because of their attractive yields and shorter terms to maturity.  At December 31, 2008, home equity loansand lines amounted to $25.6 million or 9.1% of the total loan portfolio, whichare 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 80.0% of the appraised value ofthe security property, with the exception of home equity loans and lines.  Pursuant to underwriting guidelines adoptedby the Board of Directors, the Bank will lend up to 95% of the appraised valueof the property securing a single-family residential loan, and requiresborrowers to obtain private mortgage insurance on the portion of the principalamount of the loan that exceeds 80% of the appraised value of the securityproperty.  In addition, the Bank willlend up to 90% of the appraised value with no private mortgage insurancerequired for home equity loans and lines.

 

**Multi-FamilyResidential and Commercial Real Estate Loans**.  The Bank originates and, to a lesser extent,purchases mortgage loans for the acquisition and refinancing of existingmulti-family residential and commercial real estate properties.  At December 31, 2008, $1.3 million or0.5% of the Bank’s total loan portfolio consisted of loans secured by existingmulti-family residential real estate. Commercial real estate loans increased from $122.7 million or 47.2% ofthe total loan portfolio at December 31, 2007 to $123.5 million or 43.8%of the total loan portfolio at December 31, 2008. Such increase was due tothe Bank’s strategy to increase such lending. The Bank intends to continue to place an increased emphasis on this typeof lending.

 

The majority of the Bank’s multi-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, 2008 was securedby properties located in the Bank’s primary market area.  The five largest multi-family or commercialreal estate loan relationships at December 31, 2008 amounted to $5.8million, $5.7 million, $4.2 million, $3.9 million and $3.7 million,respectively, all of which were performing in accordance with their terms andwere 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%.  As part of thecriteria for underwriting multi-family and commercial real estate loans, theBank generally imposes a debt coverage ratio (the ratio of net cash fromoperations before payment of debt service to debt service) of not less than1.1.  It is also the Bank’s generalpolicy to obtain corporate or personal guarantees, as applicable, on itsmulti-family residential and commercial real estate loans from the principalsof the borrower.

 

Multi-family andcommercial real estate lending entails significant additional risks as comparedwith single-family 

 

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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 for multi-familyand commercial real estate as well as economic conditions generally.  At December 31, 2008, the Bank had nonon-performing multi-family loans and 12 non-performing commercial real estateloans which amounted to $3.6 million.

 

**ConstructionLoans.**  The Bank alsooriginates residential and commercial construction loans, and to a limiteddegree, land acquisition and development loans. Construction loans are classified as either residential constructionloans or commercial real estate construction loans at the time of origination,depending on the nature of the property securing the loan.  The Bank’s construction lending activitiesgenerally are limited to the Bank’s primary market area.  At December 31, 2008, construction loansamounted to $25.3 million or 8.9% of the Bank’s total loan portfolio, whichconsisted of $16.4 million of residential and $8.9 million of commercial realestate construction loans.

 

The Bank’s residential construction loans are primarily made to localreal estate builders and developers for the purpose of constructingsingle-family homes and single-family residential developments.  Upon application, credit review and analysisof personal and corporate financial statements, the Bank will grant localbuilders lines of credit up to designated amounts.  These loans may be used for the purpose ofconstructing model homes, including a limited number for inventory.  In some instances, lines of credit will alsobe granted for purposes of acquiring improved lots or the purchase of constructionin 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 makes paymentsunder 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 three largest real estate construction loans had outstandingbalances of $4.6 million, $3.8 million, and $3.5 million as of December 31,2008.  The $4.6 million loan is a landand development loan for a mixed use commercial real estate project located inBradenton, Florida which is just south of Tampa.  The other two loans are residentialconstruction projects located in Philadelphia, Pennsylvania and are bothclassified as special mention due to slower than anticipated sales.

 

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.

 

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 theextent of its construction lending and has adopted underwriting guidelineswhich impose stringent loan-to-value, debt service and other requirements forloans which are believed to involve higher elements of credit risk, by limitingthe geographic area in which the Bank will do business and by working withbuilders with whom it has established relationships.  At December 31, 2008, the Bank had onenon-performing construction loan which had an outstanding balance of$896,000.  In February 2009, thisloan was transferred to other real estate owned at a carrying amount of$896,000, which approximates fair value.

 

**ConsumerLoans**.  The Bank offersconsumer loans in order to provide a full range of financial services to itscustomers and because such loans generally have shorter terms and higherinterest rates than mortgage loans.  Theconsumer loans presently offered by the Bank include student loans, depositaccount secured loans and lines of credit. Consumer loans amounted to $5.9 million or 2.1% of the total loanportfolio at December 31, 2008. Student loans amounted to $5.5 million or 1.9% of the total loanportfolio at December 31, 2008. Such loans are made to local students for a term of ten years, presentlywith adjustable interest rates.  Theinterest rate is determined by the U.S. Department of Education.  Loan repayment obligations do not begin untilthe student has completed his or her 

 

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education.  Theprincipal and interest on such loans is guaranteed by the U.S. Government.  Loans secured by deposit accounts amounted to$430,000 or 0.2% of the total loan portfolio at December 31, 2008.  Such loans are originated for up to 90% ofthe account balance, with a hold placed on the account restricting thewithdrawal of the account balance.

 

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

 

**Commercial Business Loans.**  In September 1997, the Bank opened 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 $9.0 million or 3.2%of the total loan portfolio at December 31, 2008 and were primarilysecured by inventories and other business assets.

 

Although commercial businessloans generally are considered to involve greater credit risk than othercertain types of loans, management intends to continue to offer commercialbusiness loans to small businesses located in its primary market area.  The Bank had no non-performing commercialbusiness loans at December 31, 2008.

 

**Loan FeeIncome**.  In addition tointerest earned on loans, the Bank receives income from fees in connection withloan originations, loan modifications, late payments, prepayments and formiscellaneous services related to its loans. Income from these activities varies from period to period with thevolume and type of loans made and competitive conditions. The Bank charges loanorigination fees which are calculated as a percentage of the amountborrowed.  Loan origination andcommitment fees and all incremental direct loan origination costs are deferredand recognized over the contractual remaining lives of the related loans on alevel yield basis.  Discounts and premiumson loans purchased are amortized in the same manner.

 

**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$492,000 at December 31, 2008 compared to $271,000 at December 31,2007. 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 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.

 

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.

 

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**DelinquentLoans**.  The followingtable sets forth information concerning delinquent loans at December 31,2008, in dollar amounts and as a percentage of each category of the Bank’s loanportfolio.  The amounts presentedrepresent the total outstanding principal balances of the related loans, ratherthan the actual payment amounts which are past due.

 
| ** **             | ** ** | **30— 59 Days**       | ** ** | **60 — 89 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          |       | $                                    | 471        |                                 | 0.40       | %                                  | $          | 203 |   | 0.17 | % | $ | 2,474 |   | 2.12 | % |
| Multi-family           |       | —                               |       | —                               |       | —                             |       | — |   | — |   | — |   |
| Commercial             |       | 368                                  |       | 0.30                                 |       | —                             |       | — |   | 3,551 |   | 2.88 |   |
| Land and  construction |       | 896                                  |       | 3.55                                 |       | 698                                |       | 2.77 |   | — |   | — |   |
| Commercial  business   |       | 95                                   |       | 1.06                                 |       | —                             |       | — |   | — |   | — |   |
| Consumer               |       | 38                                   |       | 0.64                                 |       | 14                                 |       | 0.24 |   | 75 |   | 1.26 |   |
|                   |       |                                 |       |                                 |       |                               |       |   |   |   |   |   |   |
| Total                  |       | $                                    | 1,868      |                                 |       |                               | $          | 915 |   |   |   | $ | 6,100 |   |   |   |

 

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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,**                | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                   | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Non-accruing  loans:                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Real estate:                                                 |       |                                 |       |   |   |   |   |   |   |   |   |
| Single-family                                                |       | $                                    | 762        |   | $ | 1,086 |   | $ | 874 |   | $ | 762 |   | $ | 762 |   |
| Multi-family                                                 |       | —                               |       | — |   | — |   | — |   | — |   |
| Commercial                                                   |       | 3,551                                |       | 416 |   | — |   | 222 |   | 580 |   |
| Land and  construction                                       |       | 896                                  |       | — |   | — |   | — |   | — |   |
| Commercial  business                                         |       | —                               |       | — |   | — |   | — |   | — |   |
| Consumer                                                     |       | —                               |       | — |   | — |   | — |   | — |   |
| Total  non-accruing loans                                    |       | 5,209                                |       | 1,502 |   | 874 |   | 984 |   | 1,342 |   |
|                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Accruing loans  90 days or more delinquent:                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Real estate:                                                 |       |                                 |       |   |   |   |   |   |   |   |   |
| Single-family                                                |       | 1,712                                |       | 563 |   | 649 |   | 942 |   | 603 |   |
| Multi-family                                                 |       | —                               |       | — |   | — |   | — |   | — |   |
| Commercial                                                   |       | —                               |       | — |   | — |   | — |   | — |   |
| Land and  construction                                       |       | —                               |       | — |   | — |   | — |   | — |   |
| Commercial  business                                         |       | —                               |       | — |   | — |   | — |   | — |   |
| Consumer                                                     |       | 75                                   |       | 32 |   | 36 |   | 14 |   | 21 |   |
| Total accruing  loans 90 days or more delinquent             |       | 1,787                                |       | 595 |   | 685 |   | 956 |   | 624 |   |
|                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Total  non-performing loans                                  |       | 6,996                                |       | 2,097 |   | 1,559 |   | 1,940 |   | 1,966 |   |
|                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Other real  estate owned:                                    |       |                                 |       |   |   |   |   |   |   |   |   |
| Real estate  acquired through, or in lieu of, foreclosure    |       | —                               |       | — |   | — |   | 1,795 |   | 3,475 |   |
| Real estate held  for development                            |       | —                               |       | — |   | — |   | — |   | — |   |
| Total other real  estate owned                               |       | —                               |       | — |   | — |   | 1,795 |   | 3,475 |   |
|                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Total  non-performing assets                                 |       | $                                    | 6,996      |   | $ | 2,097 |   | $ | 1,559 |   | $ | 3,735 |   | $ | 5,441 |   |
|                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Total  non-performing loans as a percentage of total loans   |       | 2.48                                 | %          | 0.81 | % | 0.65 | % | 0.85 | % | 0.92 | % |
|                                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Total  non-performing assets as a percentage of total assets |       | 1.65                                 | %          | 0.49 | % | 0.38 | % | 0.96 | % | 1.42 | % |

 

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.

 

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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$7.0 million or 1.65% of total assets at December 31, 2008 from $2.1million or 0.49% of total assets at December 31, 2007.  At December 31, 2008, the Bank’s $7.0million of nonperforming assets consisted of $1.8 million of accruing loans 90days or more delinquent, $5.2 million of nonaccrual loans and no other realestate owned. At December 31, 2008, nonperforming loans consisted of $2.5million in single-family residential real estate loans, $3.6 million in commercialreal estate loans, $896,000 in a residential real estate construction loan, and$75,000 in consumer and other loans.  The$3.6 million of nonperforming commercial real estate loans consists of 12 loansto 8 borrowers that are the result of cash flow stress primarily due to thecurrent economic conditions.  The Bank’smanagement continues to aggressively pursue the collection and resolution ofall delinquent loans.

 

**ClassifiedAssets.**  Federalregulations require that each insured savings association classify its assetson a regular basis. In addition, in connection with examinations of insuredinstitutions, federal examiners have authority to identify problem assets and,if appropriate, classify them.  There arethree classifications for 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 do not currently expose an insured institutionto a sufficient degree of risk to warrant classification as substandard,doubtful or loss.

 

At December 31, 2008, the Bank had $17.6 million of classifiedassets, of which $10.7 million consisted of loans classified as specialmention, $6.9 million consisted of loans classified as substandard, and noloans classified as doubtful.  The $10.7million of loans classified as special mention consisted of $285,000 incommercial real estate loans, $9.0 million in residential real estateconstruction loans, and $1.4 million in commercial business loans.  The $9.0 million in residential real estateconstruction includes five loans to three borrowers all located in the Bank’sprimary market area which have been classified as special mention due to slowerthan anticipated sales.  The $6.9 millionof loans designated as substandard consisted of $2.4 million of single-familyreal estate loans, $3.6 million in commercial real estate loans and $896,000 inresidential real estate construction loans. The Company does notknowingly 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, 2008.

 

**Allowance for Loan Losses**.  The allowance for loan losses is increased bycharges to income and decreased by chargeoffs (net of recoveries).  Allowances are provided for specific loanswhen losses are probable and can be estimated. When this occurs, management considers the remaining principal balance,fair value and estimated net realizable value of the property collateralizingthe loan.  Current and future operatingand/or sales conditions are also considered. These estimates are susceptible to changes that could result in materialadjustments to results of operations. Recovery of the carrying value of such loans is dependent to a greatextent on economic, operating and other conditions that may be beyondmanagement’s control.

 

General loan loss reserves are established as an allowance for lossesbased on inherent probable risk of loss in the loan portfolio.  In assessing risk, management considershistorical experience, volume and composition of lending conducted by the Bank,industry standards, status of non-performing loans, general economic conditionsas they relate to the market area and other factors related to thecollectibility of the Bank’s loan portfolio.

 

Impaired loans are predominantly measured based on the fair value ofthe collateral.  The provision for loanlosses charged to expense is based upon past loan loss experience and anevaluation 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.

 

Although management uses the best information available to makedeterminations with respect to the provisions for loan losses, additionalprovisions for loan losses may be required to be established in the futureshould economic or other conditions change substantially.  In addition, the Pennsylvania Department ofBanking and the FDIC, as an integral part of their examination process,periodically review the Bank’s allowance for loan losses.  Such agencies may require the Bank torecognize additions to such allowance based on their judgments aboutinformation available to them at the time of their examination.

 

14

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The following table summarizes changes in the allowance for loan lossesand other selected statistics for the periods presented.

 
| ** **                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                               | ** ** | **(Dollars in Thousands)**       | ** ** |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |
| Average loans  receivable, net (1)                       |       | $                                          | 271,849    |   | $ | 247,157 |   | $ | 232,520 |   | $ | 218,036 |   | $ | 211,278 |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |
| Allowance for  loan losses, beginning of year            |       | $                                          | 2,831      |   | $ | 2,720 |   | $ | 2,671 |   | $ | 2,608 |   | $ | 2,740 |   |
| Provision for  loan losses                               |       | 585                                        |       | 120 |   | 60 |   | 120 |   | 210 |   |
| Charge-offs:                                             |       |                                       |       |   |   |   |   |   |   |   |   |
| Single-family  residential                               |       | (3                                         | )          | (3 | ) | — |   | — |   | — |   |
| Multi-family  residential                                |       | —                                     |       | — |   | — |   | — |   | — |   |
| Commercial real  estate                                  |       | (350                                       | )          | — |   | — |   | (86 | ) | (41 | ) |
| Land and  construction                                   |       | —                                     |       | — |   | — |   | — |   | (417 | ) |
| Consumer                                                 |       | (13                                        | )          | (11 | ) | (14 | ) | (9 | ) | — |   |
| Commercial  business                                     |       | —                                     |       | — |   | — |   | — |   | — |   |
| Total  charge-offs:                                      |       | (366                                       | )          | (14 | ) | (14 | ) | (95 | ) | (458 | ) |
| Recoveries:                                              |       |                                       |       |   |   |   |   |   |   |   |   |
| Single-family  residential                               |       | —                                     |       | — |   | — |   | — |   | — |   |
| Multi-family  residential                                |       | —                                     |       | — |   | — |   | — |   | — |   |
| Commercial real  estate                                  |       | 114                                        |       | — |   | — |   | 37 |   | 116 |   |
| Land and construction                                    |       | —                                     |       | — |   | — |   | — |   | — |   |
| Consumer                                                 |       | 5                                          |       | 5 |   | 3 |   | 1 |   | — |   |
| Commercial  business                                     |       | —                                     |       | — |   | — |   | — |   | — |   |
| Total recoveries                                         |       | 119                                        |       | 5 |   | 3 |   | 38 |   | 116 |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |
| Allowance for  loan losses, end of year                  |       | $                                          | 3,169      |   | $ | 2,831 |   | $ | 2,720 |   | $ | 2,671 |   | $ | 2,608 |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |
| Net charge-offs  to average loans receivable, net        |       | 0.09                                       | %          | 0.00 | % | 0.01 | % | 0.03 | % | 0.16 | % |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |
| Allowance for  loan losses to total loans receivable     |       | 1.13                                       | %          | 1.09 | % | 1.14 | % | 1.18 | % | 1.22 | % |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |
| Allowance for  loan losses to total non-performing loans |       | 45.30                                      | %          | 135.00 | % | 174.39 | % | 137.63 | % | 132.65 | % |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |
| Net charge-offs  to allowance for loan losses            |       | 7.79                                       | %          | 0.32 | % | 0.40 | % | 2.13 | % | 13.11 | % |

 

----

(1) Includes loans held for sale.

 

15

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The followingtable presents the allocation of the allowance for loan losses to the totalamount of loans in each category listed at the dates indicated.

 
|                       |   | **December 31,**                |       |
|----------------------------|--------|--------------------------------------|------------|
|                       |   | **2008**                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** |   |
|                       |   | **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 |   | $                                    | 322        |   | 41.43 | % | $ | 391 |   | 42.92 | % | $ | 445 |   | 45.48 | % | $ | 462 |   | 45.79 | % | $ | 382 |   | 41.74 | % |
| Multi-family  residential  |   | 16                                   |       | 0.46 |   | 17 |   | 0.64 |   | 25 |   | 0.87 |   | 28 |   | 0.98 |   | 30 |   | 1.17 |   |
| Commercial real  estate    |   | 1,786                                |       | 43.84 |   | 1,713 |   | 47.24 |   | 1,691 |   | 45.39 |   | 1,698 |   | 46.52 |   | 1,706 |   | 48.45 |   |
| Land and  construction     |   | 856                                  |       | 8.97 |   | 556 |   | 5.61 |   | 416 |   | 4.94 |   | 322 |   | 3.26 |   | 332 |   | 4.25 |   |
| Consumer                   |   | 16                                   |       | 2.11 |   | 8 |   | 0.91 |   | 9 |   | 1.02 |   | 12 |   | 1.36 |   | 12 |   | 1.70 |   |
| Commercial  business       |   | 173                                  |       | 3.19 |   | 146 |   | 2.67 |   | 134 |   | 2.30 |   | 149 |   | 2.09 |   | 146 |   | 2.69 |   |
| Total                      |   | $                                    | 3,169      |   | 100.00 | % | $ | 2,831 |   | 100.00 | % | $ | 2,720 |   | 100.00 | % | $ | 2,671 |   | 100.00 | % | $ | 2,608 |   | 100.00 | % |

 

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**InvestmentActivities**

 

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

 

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,**   | ** ** |
|-----------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                        | ** ** | **(In Thousands)** | ** ** |
|                              |       |                    |       |   |   |   |   |
| Mortgage-backed  securities:      |       |                    |       |   |   |   |   |
|                              |       |                    |       |   |   |   |   |
| FNMA  pass-through certificates   |       | $                       | 16,788     |   | $ | 21,060 |   | $ | 26,045 |   |
| FHLMC  pass-through certificates  |       | 12,641                  |       | 10,872 |   | 13,190 |   |
| GNMA  pass-through certificates   |       | 2,492                   |       | 3,700 |   | 4,401 |   |
|                              |       |                    |       |   |   |   |   |
| Total  mortgage-backed securities |       | $                       | 31,921     | (1) | $ | 35,632 | (2) | $ | 43,636 | (3) |

 

----

(1)        At December 31, 2008,gross unrealized gains on such securities amounted to $738,000 and grossunrealized losses amounted to $157,000.

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

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

 

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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,** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                            | ** ** | **(In Thousands)**                    | ** ** |
|                                  |       |                                       |       |   |   |   |   |
| Mortgage-backed  securities purchased |       | $                                          | 4,340      |   | $ | — |   | $ | 6,451 |   |
| Mortgage-backed  securities sold      |       | —                                     |       | — |   | — |   |
| Principal  repayments                 |       | (8,258                                     | )          | (8,959 | ) | (11,412 | ) |
| Other, net                            |       | 207                                        |       | 955 |   | 235 |   |
|                                  |       |                                       |       |   |   |   |   |
| Net decrease                          |       | $                                          | (3,711     | ) | $ | (8,004 | ) | $ | (4,726 | ) |

 

Mortgage-backed securities generally increase the quality of the Bank’sassets by virtue of the insurance or guarantees that back them, are more liquidthan individual mortgage loans and may be used to collateralize borrowings orother obligations of the Bank.  At December 31,2008, $5.6 million of the Bank’s mortgage-backed securities were pledged tosecure various obligations of the Bank. See Note 4 to the Consolidated Financial Statements.  The Company does not knowingly invest in subprime financialinstruments, and has not been materially impacted by the currentsubprime crisis as of December 31, 2008.

 

Informationregarding the contractual maturities and weighted average yield of the Bank’smortgage-backed securities portfolio at December 31, 2008 is presentedbelow.

 
| ** **                       | ** ** | **December 31, 2008**      | ** ** |
|----------------------------------|------------|--------------------------------------|------------|
| ** **                       | ** ** | **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 |       | $                                    | —     |   | $ | 1,516 |   | $ | 6,724 |   | $ | 4,401 |   | $ | 12,641 |   |
| FNMA  pass-through certificates  |       | —                               |       | 1,423 |   | 13,347 |   | 2,019 |   | 16,788 |   |
| GNMA  pass-through certificates  |       | —                               |       | — |   | — |   | 2,492 |   | 2,492 |   |
| Total                            |       | $                                    | —     |   | $ | 2,939 |   | $ | 20,071 |   | $ | 8,912 |   | $ | 31,921 | (1) |
|                             |       |                                 |       |   |   |   |   |   |   |   |   |
| Weighted average  yield          |       | —                               | %          | 4.68 | % | 5.96 | % | 5.31 | % | 4.80 | % |

 

----

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

 

The Bank is authorized to invest in obligations issued or fullyguaranteed by the U.S. Government, certain federal agency obligations, insuredmunicipal obligations, certain mutual funds, investment grade corporate debtsecurities and other specified investments. At December 31, 2008, the Bank’s investment securities amounted to$62.1 million, of which $37.8 million was designated as available for sale and$24.3 million was designated as held to maturity.  The Bank has designated the majority of itsinvestment securities as available for sale in order to respond to changes inmarket rates, increases in loan demand, and changes in liquidity needs.

 

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

 
| ** **                             | ** ** | **December 31,**   | ** ** |
|----------------------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                             | ** ** | **Amortized  Cost**     | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
| ** **                             | ** ** | **(In Thousands)** | ** ** |
|                                   |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government  and agency securities |       | $                       | 37,448     |   | $ | 37,814 |   | $ | 26,335 |   | $ | 26,472 |   | $ | 15,990 |   | $ | 15,858 |   |
|                                   |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Municipal  obligations                 |       | 24,256                  |       | 23,958 |   | 22,247 |   | 22,827 |   | 24,251 |   | 24,889 |   |
| Mutual funds (2)                       |       | —                  |       | — |   | 19,142 |   | 19,142 |   | 20,001 |   | 19,195 |   |
|                                   |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Total                                  |       | $                       | 61,704     | (1) | $ | 61,772 | (1) | $ | 67,724 |   | $ | 68,441 |   | $ | 60,242 |   | $ | 59,942 |   |

 

----

(1)        At December 31, 2008,investment securities with an amortized cost totaling $37.4 million weredesignated as available for sale.  At December 31,2008, gross unrealized losses amounted to $13,000 and there were $379,000 ingross unrealized gains.  At December 31,2008, $4.0 million or 10.7% of the Bank’s investment securities were pledged tosecure various obligations of the Bank. See Note 3 to the Consolidated Financial Statements.

 

(2)        During 2008, the Companyrecognized $882,000 in impairment charges on these mutual funds compared to an$860,000 impairment in 2007.  The Companyattributes the lower valuations of these mutual funds to a significant wideningof spreads primarily due to the mortgage-related securities underlying thesefunds.  This spread differential isprimarily due to the general lack of investor interest for these type ofsecurities in the current market environment. On August 20, 2008, subsequent to recording impairment charges, theCompany sold these mutual funds to Alliance Mutual Holding Company at fairvalue.

 

19

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Informationregarding the contractual maturities and weighted average yield of the Bank’sinvestment securities portfolio at December 31, 2008 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, 2008** | ** ** |
|----------------------------------------|------------|-----------------------------------------|------------|
| ** **                             | ** ** | **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 |       | $                                       | 998        |   | $ | 1,000 |   | $ | 17,988 |   | $ | 17,461 |   | $ | 37,447 | (1) |
| Municipal  obligations                 |       | —                                  |       | — |   | 7,639 |   | 16,617 |   | 24,256 | (2) |
| Total                                  |       | $                                       | 998        |   | $ | 1,000 |   | $ | 25,627 |   | $ | 34,078 |   | $ | 61,771 |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |
| Weighted average  yield                |       | 5.38                                    | %          | 5.45 | % | 5.16 | % | 5.06 | % | 5.11 | % |

 

----

(1) The $37.4million of U.S. Government agency securities are designated as available forsale.

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

 

**Sourcesof Funds**

 

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

 

**Deposits**.  The Bank’s deposit products include a broadselection of deposit instruments, including NOW accounts, money marketaccounts, regular savings accounts and term certificate accounts.  Deposit account terms vary, with theprincipal difference being the minimum balance required, the time periods thefunds must remain on deposit and the interest rate.

 

The Bank 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, GlenMills, Havertown, Springfield, Lansdowne, Paoli, and Secane offices.  The Bank utilizes traditional marketingmethods to attract new customers and savings deposits, including print mediaadvertising and direct mailings.  TheBank does not advertise for deposits outside of its primary market area or utilizethe services of deposit brokers, and management believes that an insignificantnumber of deposit accounts were held by non-residents of Pennsylvania at December 31,2008.

 

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 be acceptedby the public, the Bank intends to continue to promote longer term deposits tothe extent possible and consistent with its asset and liability managementgoals.

 

20

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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,**                | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|
| ** **                               | ** ** | **2008**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                               | ** ** | **Amount**                           | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                               | ** ** | **(Dollars in Thousands)** | ** ** |
|                                     |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Passbook and  statement savings accounts |       | $                                    | 39,378     |   | 11.87 | % | $ | 38,223 |   | 11.56 | % | $ | 43,512 |   | 13.04 | % |
| Money market  accounts                   |       | 22,501                               |       | 6.78 |   | 25,105 |   | 7.59 |   | 24,255 |   | 7.27 |   |
| Certificates of  deposit                 |       | 207,943                              |       | 62.69 |   | 201,860 |   | 60.90 |   | 200,228 |   | 59.98 |   |
| NOW and Super  NOW accounts              |       | 48,269                               |       | 14.55 |   | 48,760 |   | 12.81 |   | 43,859 |   | 13.13 |   |
| Non-interest  bearing accounts           |       | 13,610                               |       | 4.10 |   | 16,840 |   | 7.14 |   | 21,948 |   | 6.58 |   |
|                                     |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Total deposits  at end of year           |       | $                                    | 331,701    |   | 100.00 | % | $ | 330,788 |   | 100.00 | % | $ | 333,802 |   | 100.00 | % |

 

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

 
| ** **                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | **(In Thousands)**                    | ** ** |
|                                          |       |                                       |       |   |   |   |   |
| (Decrease)  increase before interest credited |       | $                                          | (10,839    | ) | $ | (14,632 | ) | $ | 28,552 |   |
| Interest  credited                            |       | 11,752                                     |       | 11,618 |   | 8,350 |   |
| Net deposit  increase (decrease)              |       | $                                          | 913        |   | $ | (3,014 | ) | $ | 36,902 |   |

 

The followingtable sets forth maturities of the Bank’s certificates of deposit of $100,000or more at December 31, 2008 by time remaining to maturity.

 
| ** **                             | ** ** | **Amounts in  Thousands** | ** ** |
|----------------------------------------|------------|--------------------------------|------------|
|                                   |       |                           |       |
| Three months or  less                  |       | $                              | 5,080      |   |
| Over three  months through six months  |       | 15,644                         |       |
| Over six months  through twelve months |       | 8,494                          |       |
| Over twelve  months                    |       | 10,974                         |       |
| Total                                  |       | $                              | 40,192     |   |

 

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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,**                | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|
| ** **                               | ** ** | **2008**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                               | ** ** | **Average  Balance**                 | ** ** | **Average  Rate  Paid** | ** ** | **Average  Balance** | ** ** | **Average  Rate  Paid** | ** ** | **Average  Balance** | ** ** | **Average  Rate  Paid** | ** ** |
| ** **                               | ** ** | **(Dollars in Thousands)** | ** ** |
|                                     |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Passbook and  statement Savings accounts |       | $                                    | 39,155     |   | 0.55 | % | $ | 38,212 |   | 0.75 | % | $ | 49,215 |   | 0.75 | % |
| Money market  accounts                   |       | 22,979                               |       | 1.59 |   | 25,105 |   | 2.75 |   | 23,158 |   | 1.67 |   |
| Certificates of  deposit                 |       | 203,122                              |       | 3.94 |   | 201,860 |   | 4.73 |   | 173,547 |   | 3.90 |   |
| NOW and Super  NOW                       |       | 49,201                               |       | 1.50 |   | 48,771 |   | 2.66 |   | 39,848 |   | 2.05 |   |
| Non-interest  bearing accounts           |       | 15,731                               |       | — |   | 16,840 |   | — |   | 17,699 |   | — |   |
| Total average  deposits                  |       | $                                    | 330,188    |   | 2.97 | %(1) | $ | 330,788 |   | 3.75 | %(1) | $ | 303,467 |   | 2.92 | %(1) |

 

----

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

 

The following table presents, by various interest rate categories, theamount of certificates of deposit at December 31, 2008 and 2007 and theamounts at December 31, 2008, which mature during the periods indicated.

 
| **Certificates of ** | ** ** | **December 31,**   | ** ** | **Amounts at December 31, 2008  Maturing Within** | ** ** |
|--------------------------------|------------|-------------------------|------------|----------------------------------------------------------------------------|------------|
| **Deposit**                    | ** ** | **2008**                | ** ** | **2007**                                                                   | ** ** | **One Year** | ** ** | **Two Years** | ** ** | **Three Years** | ** ** | **Thereafter** | ** ** |
| ** **                     | ** ** | **(In Thousands)** | ** ** |
|                           |       |                    |       |                                                                       |       |   |   |   |   |   |   |   |   |
| 2.0% or less                   |       | $                       | 1,095      |                                                                       | $          | — |   | $ | 1,050 |   | $ | — |   | $ | 45 |   | $ | — |   |
| 2.01% to 4.0%                  |       | 175,533                 |       | 11,440                                                                     |       | 139,414 |   | 32,134 |   | 2,603 |   | 1,382 |   |
| 4.01% to 6.0%                  |       | 31,315                  |       | 190,420                                                                    |       | 15,168 |   | 5,980 |   | 8,987 |   | 1,180 |   |
| Total  certificates of deposit |       | $                       | 207,943    |                                                                       | $          | 201,860 |   | $ | 155,632 |   | $ | 38,114 |   | $ | 11,635 |   | $ | 2,562 |   |

 

**Borrowings**.  The Bank may obtain advances from the FHLB ofPittsburgh upon the security of the common stock it owns in that bank andcertain of its loans, provided certain standards related to creditworthinesshave been met. Such advances are made pursuant to several credit programs, eachof which has its own interest rate and range of maturities.  Such advances are generally available to meetseasonal and other withdrawals of deposit accounts and to permit increasedlending.  At December 31, 2008, theBank had $37.0 million of advances from the FHLB of Pittsburgh.  Of the $37.0 million of FHLB advances at December 31,2008, $5.0 million is due in 2009 and $32.0 million is due in 2010.  There are prepayment penalties associatedwith substantially all of the Bank’s FHLB advances.  The weighted average interest rate of theBank’s FHLB advances was 6.30% as of December 31, 2008.  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.  FHLB stock is requiredto be held when advances from the FHLB are taken.

 

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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,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                                                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                   | ** ** | **(Dollars in Thousands)**                                         | ** ** |
|                                                         |       |                                                                         |       |   |   |   |   |
| FHLB of  Pittsburgh advances:                                |       |                                                                         |       |   |   |   |   |
| Average balance  outstanding                                 |       | $                                                                            | 37,000     |   | $ | 37,153 |   | $ | 47,684 |   |
| Maximum amount  outstanding at any month-end during the year |       | 37,100                                                                       |       | 37,170 |   | 52,182 |   |
| Balance  outstanding at end of year                          |       | 37,000                                                                       |       | 37,000 |   | 37,173 |   |
| Weighted average  interest rate during the year              |       | 6.30                                                                         | %          | 6.37 | % | 6.21 | % |
|                                                         |       |                                                                         |       |   |   |   |   |
| Weighted average  interest rate at end of period             |       | 6.30                                                                         | %          | 6.30 | % | 6.30 | % |
|                                                         |       |                                                                         |       |   |   |   |   |
| Total  borrowings:                                           |       |                                                                         |       |   |   |   |   |
| Average balance  outstanding                                 |       | $                                                                            | 37,815     |   | $ | 37,356 |   | $ | 47,990 |   |
| Maximum amount  outstanding at any month-end during the year |       | 39,812                                                                       |       | 38,975 |   | 52,639 |   |
| Balance  outstanding at end of year                          |       | 37,198                                                                       |       | 37,042 |   | 37,210 |   |
| Weighted average  interest rate during the year              |       | 6.27                                                                         | %          | 6.37 | % | 6.21 | % |
| Weighted average  interest rate at end of year               |       | 6.30                                                                         | %          | 6.34 | % | 6.29 | % |

 

**Employees**

 

The Bank had 70full-time employees and 32 part-time employees at December 31, 2008.  None of these employees is represented by acollective bargaining agent, and the Bank believes that it enjoys goodrelations with its personnel.

 

**Subsidiaries**

 

Presently, theBank has two wholly-owned subsidiaries, Alliance Delaware Corp., which holdsand manages certain investment securities and Alliance Financial and InvestmentServices LLC which participates in commission fees. Alliance Delaware Corp. wasformed in 1999 to accommodate the transfer of certain assets that are legalinvestments for the Bank and to provide for a greater degree of protection toclaims of creditors. The laws of the State of Delaware and the court systemcreate a more favorable environment for the business affairs of thesubsidiary.  Alliance Delaware Corp.currently manages certain investments for the Bank, which, as of December 31,2008 and 2007, amounted to $55.9 million and $53.7 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 ability to generally provide a rate of return,liquidity and risk comparable to that offered by competing investmentopportunities.

 

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

 

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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.  Competition may increase as a result of thecontinuing reduction of restrictions on the interstate operations of financialinstitutions.

 

**REGULATION**

 

**General.**  Alliance Bancorp and Alliance Mutual HoldingCompany, as federally-chartered savings and loan holding companies, arerequired to file certain reports with, and are subject to examination by, andotherwise must comply with the rules and regulations of the Office ofThrift Supervision. Alliance Bancorp is also subject to the rules andregulations of the Securities and Exchange Commission under the federalsecurities laws.

 

Alliance Bank is a Pennsylvania-chartered savings bank and is subjectto extensive regulation and examination by the Pennsylvania Department ofBanking and by the FDIC, and is also subject to certain requirementsestablished by the Federal Reserve Board. The federal and state laws and regulations which are applicable to banksregulate, among other things, the scope of their business, their investments,their reserves against deposits, the timing of the availability of depositedfunds and the nature and amount of and collateral for certain loans.  There are periodic examinations by thePennsylvania Department of Banking and the FDIC to test Alliance Bank’scompliance 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 and depositors.  The regulatory structure also gives theregulatory authorities extensive discretion in connection with theirsupervisory and enforcement activities and examination policies, includingpolicies with respect to the classification of assets and the establishment ofadequate 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 statutory and regulatory requirements that areapplicable to Alliance Bank, Alliance Bancorp and Alliance Mutual HoldingCompany are described below.  Thisdescription of statutes and regulations is not intended to be a completeexplanation of such statutes and regulations and their effects on AllianceBank, Alliance Bancorp and Alliance Mutual Holding Company and is qualified inits entirety by reference to the actual statutes and regulations.

 

**Regulation of Alliance Bank**

** **

**Pennsylvania Banking Law.**  The Pennsylvania Banking Code of 1965 (the “BankingCode”) contains detailed provisions governing the organization, location ofoffices, rights and responsibilities of directors, officers, employees andmembers, as well as corporate powers, savings and investment operations andother aspects of Alliance Bank and its affairs. The Banking Code delegates extensive rulemaking power and administrativediscretion to the Department so that the supervision and regulation ofstate-chartered savings banks may be flexible and readily responsive to changesin economic conditions and in savings and lending practices.

 

One of the purposes of the Banking Code is to provide savings bankswith the opportunity to be competitive with each other and with other financialinstitutions existing under other Pennsylvania laws and other state, federaland foreign laws.  A Pennsylvania savingsbank may locate or change the location of its principal place of business and establishan office anywhere in the Commonwealth, with the prior approval of theDepartment.

 

The Department generally examines each savings bank not less frequentlythan once every two years.  Although theDepartment may accept the examinations and reports of the FDIC in lieu of itsown examination, the present practice is for the Department to conductindividual examinations.  The Departmentmay order any savings bank to discontinue any violation of law or unsafe or unsoundbusiness practice and may direct any trustee, officer, attorney or employee ofa savings bank engaged in an objectionable activity, after the Department hasordered the activity to be terminated, to show cause at a hearing before theDepartment why such person should not be removed.

 

**EmergencyEconomic Stabilization Act of 2008.** The U.S. Congressadopted, and on October 3, 2008, President George W. Bush signed, theEmergency 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 holding companiesin a troubled asset relief program. The purpose of the troubled asset reliefprogram is to restore confidence and stability to the U.S. banking system andto encourage financial institutions to increase their lending to customers andto each other. The troubled asset relief 

 

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program is alsoexpected to include direct purchases or guarantees of troubled assets offinancial institutions. The Treasury Department has allocated $250 billiontowards a capital purchase program. Under the capital purchase program, theTreasury Department will purchase debt or equity securities from participatinginstitutions. We have elected not to participate in the capital purchaseprogram.

 

The FederalDeposit Insurance Corporation increased deposit insurance on most accounts from$100,000 to $250,000, until the end of 2009. In addition, pursuant to Section 13(c)(4)(G) ofthe Federal Deposit Insurance Act, the Federal Deposit Insurance Corporationhas implemented two temporary programs to provide deposit insurance for thefull amount of most non-interest bearing transaction deposit accounts throughthe end of 2009 and to guarantee certain unsecured debt of financialinstitutions and their holding companies through June 2012. Fornon-interest bearing transaction deposit accounts, including accounts sweptfrom a non-interest bearing transaction account into a non-interest bearing savingsdeposit account, a 10 basis point annual rate surcharge will be applied todeposit amounts in excess of $250,000. Financial institutions could have optedout of either 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.

 

**Insuranceof Accounts** . The deposits of Alliance Bank are insured tothe maximum extent permitted by the Deposit Insurance Fund and are backed bythe full faith and credit of the U.S. Government. As insurer, the FederalDeposit Insurance Corporation is authorized to conduct examinations of, and torequire reporting by, insured institutions. It also may prohibit any insuredinstitution from engaging in any activity determined by regulation or order topose a serious threat to the Federal Deposit Insurance Corporation. The FederalDeposit Insurance Corporation also has the authority to initiate enforcementactions against savings institutions, after giving the Office of ThriftSupervision an opportunity to take such action.

 

Under regulations effective January 1, 2007, the FDIC adopted a newrisk-based premium system that provides for quarterly assessments based on aninsured institution’s ranking in one of four risk categories based uponsupervisory and capital evaluations. Well-capitalized institutions (generally those with CAMELS compositeratings of 1 or 2) are grouped in Risk Category I and assessed for depositinsurance at an annual rate of between five and seven basis points.  The assessment rate for an individualinstitution is determined according to a formula based on a weighted average ofthe institution’s individual CAMEL component ratings plus either five financialratios or, in the case of an institution with assets of $10.0 billion or more,the average ratings of its long-term debt. Institutions in Risk Categories II, III and IV are assessed atannual rates of 10, 28 and 43 basis points, respectively.

 

In addition, allinstitutions with deposits insured by the Federal Deposit Insurance Corporationare required to pay assessments to fund interest payments on bonds issued bythe Financing Corporation, a mixed-ownership government corporation establishedto recapitalize the predecessor to the Deposit Insurance Fund. The annualassessment rate set for the fourth quarter of 2008 was 0.00275% of insureddeposits and is adjusted quarterly. These assessments will continue until theFinancing Corporation bonds mature in 2019.

 

The FederalDeposit Insurance Corporation may terminate the deposit insurance of anyinsured depository institution, including Alliance Bank, if it determines aftera hearing that the institution has engaged or is engaging in unsafe or unsoundpractices, is in an unsafe or unsound condition to continue operations, or hasviolated any applicable law, regulation, order or any condition imposed by anagreement with the Federal Deposit Insurance Corporation. It also may suspenddeposit insurance temporarily during the hearing process for the permanenttermination of insurance, if the institution has no tangible capital. Ifinsurance of accounts is terminated, the accounts at the institution at thetime of the termination, less subsequent withdrawals, shall continue to beinsured for a period of six months to two years, as determined by the FederalDeposit Insurance Corporation. Management is aware of no existing circumstanceswhich would result in termination of Alliance Bank’s deposit insurance.

 

On October 16, 2008, the Federal Deposit Insurance Corporationpublished a restoration plan designed to replenish the Deposit Insurance Fundover a period of five years and to increase the deposit insurance reserveratio, which decreased to 1.01% of insured deposits on June 30, 2008, tothe statutory minimum of 1.15% of insured deposits by December 31, 2013.In order to implement the restoration plan, the Federal Deposit InsuranceCorporation proposes to change both its risk-based assessment system and itsbase assessment rates. Assessment rates would increase by seven basis pointsacross the range of risk weightings of depository institutions. Changes to therisk-based assessment system would include increasing premiums for institutionsthat rely on excessive amounts of brokered deposits, including CDARS,increasing premiums for excessive use of secured liabilities, including FederalHome Loan Bank advances, lowering premiums for smaller institutions with veryhigh capital levels, and adding financial ratios and debt issuer ratings to thepremium calculations for banks with over $10 billion in assets, while providinga reduction for their unsecured debt. Higher assessments for well-managed and well-capitalized institutionsthat rely significantly on brokered-deposits will apply only when accompaniedby rapid asset growth.

 

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On February 27, 2009, the FDIC also adopted an interim rule imposinga 20 basis point emergency special assessment on insured institutions as of June 30,2009, payable on September 30, 2009. The interim rule also permits the FDIC to impose an additionalspecial assessment after June 30, 2009, of up to 10 basis points, ifnecessary to maintain public confidence in federal deposit insurance.  However, FDIC Chairman Bair has indicated ina letter to Senate Banking Committee Chairman Dodd that, if the U.S. Congresspasses a bill increasing the FDIC’s authority to borrow from the U.S.Department of Treasury, the FDIC would reduce the proposed specialassessment.  The U.S. Congress iscurrently considering the legislation on such increase in borrowing authority.

 

**Capital Requirements.**  The FDIC has promulgated regulations and adopteda statement of policy regarding the capital adequacy of state-chartered bankswhich, like Alliance Bank, 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 capital regulations establish a minimum 3.0% Tier I leveragecapital requirement for the most highly-rated state-chartered, non-memberbanks, with an additional cushion of at least 100 to 200 basis points for allother state-chartered, non-member banks, which effectively will increase theminimum Tier I leverage ratio for such other banks to 4.0% to 5.0% ormore.  Under the FDIC’s regulation,highest-rated banks are those that the FDIC determines are not anticipating orexperiencing significant growth and have well diversified risk, including noundue interest rate risk exposure, excellent asset quality, high liquidity,good earnings and, in general, which are considered a strong bankingorganization and are rated composite 1 under the Uniform Financial InstitutionsRating System.  Leverage or core capitalis defined as the sum of common stockholders’ equity (including retainedearnings), noncumulative perpetual preferred stock and related surplus, andminority interests in consolidated subsidiaries, minus all intangible assetsother than certain qualifying supervisory goodwill and certain purchasedmortgage servicing rights.

 

The FDIC also requires that savings banks meet a risk-based capitalstandard.  The risk-based capitalstandard for savings banks requires the maintenance of total capital (which isdefined as Tier I capital and supplementary (Tier 2) capital) to risk weightedassets of 8%.  In determining the amountof risk-weighted assets, all assets, plus certain off balance sheet assets, aremultiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believesare inherent in the type of asset or item. The components of Tier I capital are equivalent to those discussed aboveunder the 3% leverage capital standard. The components of supplementary capital include certain perpetualpreferred stock, certain mandatory convertible securities, certain subordinateddebt and intermediate preferred stock and general allowances for loan and leaselosses.  Allowance for loan and leaselosses includable in supplementary capital is limited to a maximum of 1.25% ofrisk-weighted assets.  Overall, theamount of capital counted toward supplementary capital cannot exceed 100% ofcore capital.

 

Alliance Bank is also subject to more stringent Department 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, 2008, Alliance Bank’s capital ratios exceeded eachof its capital requirements.

 

**Activities and Investments of InsuredState-Chartered Banks.** The activities and equity investments of FDIC-insured, state-charteredbanks are generally limited to those that are permissible for nationalbanks.  Under regulations dealing withequity investments, 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 orretaining a majority interest in a subsidiary;

 

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

 

·                                        acquiring up to10% of the voting stock of a company that solely provides or reinsuresdirectors’, trustees’ and officers’ liability insurance coverage or bankers’blanket bond group insurance coverage for insured depository institutions; and

 

·                                        acquiring orretaining the voting shares of a depository institution if certain requirementsare met.

 

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The FDIC has adopted regulations pertaining to theother activity restrictions imposed upon insured state banks and theirsubsidiaries.  Pursuant to such regulations,insured state banks engaging in impermissible activities may seek approval fromthe FDIC to continue such activities. State banks not engaging in such activities but that desire to engage inotherwise impermissible activities either directly or through a subsidiary mayapply for approval from the FDIC to do so; however, if such bank fails to meetthe minimum capital requirements or the activities present a significant riskto the FDIC insurance funds, such application will not be approved by the FDIC.  Pursuant to this authority, the FDIC hasdetermined that investments in certain majority-owned subsidiaries of insuredstate banks do not represent a significant risk to the deposit insurance funds.  Investments permitted under that authorityinclude real estate activities and securities activities.

 

**Restrictions on CapitalDistributions.** Officeof Thrift Supervision regulations govern capital distributions bysavings institutions, which include cash dividends, stock repurchases and othertransactions charged to the capital account of a savings institution to makecapital distributions.  These regulationsapply to Alliance Mutual Holding Company and Alliance Bancorp.  Under applicable regulations, a savingsinstitution must file an application for Office of Thrift Supervision approvalof the capital distribution if:

 

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

 

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

 

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

 

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

 

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

 

An institution that either before or after a proposedcapital distribution fails to meet its then applicable minimum capitalrequirement or that has been notified that it needs more than normalsupervision may not make any capital distributions without the prior writtenapproval of the Office of Thrift Supervision. In addition, the Office of Thrift Supervision may prohibit a proposedcapital distribution, which would otherwise be permitted by Office of ThriftSupervision regulations, if the Office of Thrift Supervision determines thatsuch distribution would constitute an unsafe or unsound practice.

 

The FDIC prohibits an insured depository institutionfrom paying dividends on its capital stock or interest on its capital notes ordebentures (if such interest is required to be paid only out of net profits) ordistributing any of its capital assets while it remains in default in thepayment of any assessment due the FDIC. Alliance Bank is currently not in default in any assessment payment tothe FDIC.

 

**Privacy Requirements of the Gramm-Leach-BlileyAct.**  Federal lawplaces limitations on financial institution like Alliance Bank regarding thesharing of consumer financial 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 imposevarious requirements on financial institutions intends to prevent the use ofthe U.S. financial system to fund terrorist activities.  These provision include a requirement thatfinancial institutions operating in the United States have anti-moneylaundering compliance programs, due diligence policies and controls to ensurethe detection and reporting of money laundering. Such compliance programssupplement existing compliance requirements, also applicable to financialinstitutions, under the Bank Secrecy Act and the Office of Foreign AssetsControl Regulations.  Alliance Bank hasestablished policies and procedures to ensure compliance with the federalanti-laundering provisions.

 

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**Regulatory Enforcement Authority.**  Applicable banking laws include substantialenforcement powers available to federal banking regulators.  This enforcement authority includes, amongother things, the ability to assess civil money penalties, to issuecease-and-desist or removal orders and to initiate injunctive actions againstbanking organizations and institution-affiliated parties, as defined.  In general, these enforcement actions may beinitiated for violations of laws and regulations and unsafe or unsoundpractices.  Other actions or inactionsmay provide the basis for enforcement action, including misleading or untimelyreports filed with regulatory authorities.

 

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

 

·                                         investingin the stock of a savings institution;

 

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

 

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

 

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

 

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

 

Generally, companies that become savings and loanholding companies following the May 4, 1999 grandfather date in theGramm-Leach-Bliley Act of 1999 may engage only in the activities permitted forfinancial institution holding companies or for multiple savings and loanholding companies.

 

In addition, Alliance Bancorp is not permitted to beacquired unless the acquirer is engaged solely in financial activities or toacquire a company unless the company is engaged solely in financial activities.

 

If a mutual holding company or a mutual holdingcompany subsidiary holding company acquires or merges with another holdingcompany, the holding company acquired or the holding company resulting fromsuch merger or acquisition may only invest in assets and engage in theactivities listed above, and it has a period of two years to cease anynon-conforming activities and divest any non-conforming investments.  As of the date hereof, Alliance MutualHolding Company was not engaged in any non-conforming activities and it did nothave 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.

 

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**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 new activity or makeany new investment, directly or indirectly, unless such activity or investmentis permissible for a national bank;

 

·                                         the branching powers of the institution shall be restrictedto those of a national bank; and

 

·                                         payment of dividends by the institution shall be subject tothe rules regarding payment of dividends by a national bank.

 

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

 

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

 

**Limitations on Transactions with Affiliates.**  Transactions between savings institutions andany affiliate are governed by Sections 23A and 23B of the Federal ReserveAct.  An affiliate of a savingsinstitution is any company or entity which controls, is controlled by or isunder common control with the savings institution.  In a mutual holding company context, themutual holding company and mid-tier holding company of a savings institution(such as Alliance Bancorp and Alliance Mutual Holding Company) and anycompanies which are controlled by such holding companies are affiliates of thesavings institution.  Generally, Section 23Alimits the extent to which the savings institution or its subsidiaries mayengage in “covered transactions” with any one affiliate to an amount equal to10% of such institution’s capital stock and surplus, and contain an aggregatelimit on all such transactions with all affiliates to an amount equal to 20% ofsuch capital stock and surplus.  Section 23Bapplies to “covered transactions” as well as certain other transactions andrequires that all transactions be on terms substantially the same, or at leastas favorable, to the savings institution as those provided to anon-affiliate.  The term “coveredtransaction” includes the making of loans to, purchase of assets from andissuance of a guarantee to an affiliate and similar transactions.  Section 23B transactions also includethe provision of services and the sale of assets by a savings institution to anaffiliate.  In addition to therestrictions imposed by Sections 23A and 23B, Section 11 of the 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 ofextensions of 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 31,2007, 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.

 

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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).

 

**Waivers of Dividends by Alliance Mutual HoldingCompany**.  It is thepolicy of a number of mutual holding companies to waive the receipt ofdividends declared by their subsidiary companies.  Office of Thrift Supervision regulations requireAlliance Mutual Holding Company to notify the Office of Thrift Supervision ofany proposed waiver of its receipt of dividends from Alliance Bancorp.  The Office of Thrift Supervision reviewsdividend waiver notices on a case-by-case basis, and, in general, does notobject to any such waiver if the waiver of cash dividends would not bedetrimental to the safe and sound operation of the subsidiary institution.  The Company has, and anticipates in thefuture, that Alliance Mutual Holding Company will waive dividends paid byit.  Under Office of Thrift Supervisionregulations, public stockholders are not diluted because any dividends waivedby a mutual holding company are not considered in determining an appropriateexchange ratio in the event the mutual holding company converts to stock form.

 

A condition imposed on Alliance Bank by the FDIC inconnection with its formation of a mutual holding company required that (1) anydividends waived by the mutual holding company must be retained by the Bank andsegregated, earmarked, or otherwise identified on the books and records, and (2) thatin the event of a conversion of the mutual holding company to stock form theamount of waived dividends must be taken into account in any valuation of theBank and mutual holding company and factored into the calculation used inestablishing a fair and reasonable basis for exchanging Bank shares for holdingcompany shares, and that such amounts would not be available for payment tominority shareholders of the Bank by any means, including through dividendpayments or at liquidation.  Thepreviously imposed condition described above remains enforceable.

 

**Federal Home Loan Bank System**.  Alliance Bank is a member of the Federal HomeLoan Bank of Pittsburgh, which is one of 12 regional Federal Home LoanBanks.  Each Federal Home Loan Bankserves as a reserve or central bank for its members within its assignedregion.  It is funded primarily fromfunds deposited by member institutions and proceeds from the sale ofconsolidated obligations of the Federal Home Loan Bank System.  It makes loans to members (i.e., advances) inaccordance with policies and procedures established by the board of directorsof the Federal Home Loan Bank.

 

As a member, Alliance Bank is required to purchase andmaintain stock in the Federal Home Loan Bank of Pittsburgh in an amount equalto the greater of 1% of its aggregate unpaid residential mortgage loans, homepurchase contracts or similar obligations at the beginning of each year or 5%of its outstanding advances from the Federal Home Loan Bank.  At December 31, 2008, Alliance Bank wasin compliance with this requirement.

 

**Federal Reserve Board System.**  The Federal Reserve Board requires alldepository institutions to maintain non-interest bearing reserves at specifiedlevels against their transaction accounts, which are primarily checking and NOWaccounts, and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by theFederal Reserve Board may be used to satisfy the liquidity requirements thatare imposed by the Pennsylvania Department of Banking.  At December 31, 2008, Alliance Bank wasin compliance with these reserve requirements.

 

**FEDERALAND STATE TAXATION**

 

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

 

**Method of Accounting.**  For federal income tax purposes, income and expensesare reported on the accrual method of accounting and Alliance Bancorp files itsfederal income tax return using a December 31 fiscal year end.

 

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**Bad Debt Reserves.**  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.

 

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

 

At December 31, 2008, Alliance Bank’s totalfederal pre-1988 reserve was approximately $7.1 million.  The reserve reflects the cumulative effectsof federal tax deductions for which no federal income tax provisions have beenmade.

 

**Minimum Tax.**  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, 2008, had $1.2 million of AMT available as credit forcarryover purposes.

 

**Net Operating Loss Carryovers.**  Net operating losses incurred in taxableyears beginning before August 6, 1997 may be carried back to the threepreceding taxable years and forward to the succeeding 15 taxable years.  For net operating losses in years beginningafter August 5, 1997, other than 2001 and 2002, such net operating lossescan be carried back to the two preceding taxable years and forward to thesucceeding 20 taxable years.  Netoperating losses arising in 2001 or 2002 may be carried back five years and maybe carried forward 20 years.  At December 31,2008, Alliance Bank had no net operating loss carryforwards respectively, forfederal income tax purposes.

 

**Corporate Dividends-ReceivedDeduction.**  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.

 

**Pennsylvania Taxation.**  Alliance Bancorp is subject to thePennsylvania Corporate Net Income Tax and Capital Stock and Franchise Tax.  The Corporation Net Income Tax rate forfiscal 2007 is 9.99% and is imposed on unconsolidated taxable income forfederal purposes with certain adjustments. In general, the Capital Stock Tax is a property tax imposed at the rateof approximately 0.289% (for 2008) of a corporation’s capital stock value,which is determined in accordance with a fixed formula based upon average netincome and net worth.

 

Alliance Bank is subject to tax under the PennsylvaniaMutual Thrift Institutions Tax Act (the “MTIT”), as amended to include thriftinstitutions having capital stock. Pursuant to the MTIT, the tax rate is 11.5%.  The MTIT exempts Alliance Bank from othertaxes imposed by the Commonwealth of Pennsylvania for state income tax purposesand from all local taxation imposed by political subdivisions, except taxes onreal estate and real estate transfers. The MTIT is a tax upon net earnings, determined in accordance with U.S.generally accepted accounting principles with certain adjustments.  The MTIT, in computing income under U.S.generally accepted accounting principles, allows for the deduction of interestearned on state and federal obligations, while disallowing a percentage of athrift’s interest expense deduction in the proportion of interest income onthose securities to the overall interest income of Alliance Bank.  Net operating losses, if any, thereafter canbe carried forward three years for MTIT purposes.  At December 31, 2008, the Bank hadapproximately $579,000, $790,000 and $1.4 million in NOL carryforwards expiringin 2009, 2010 and 2011, respectively, for state tax purposes.

 

**Item1A.  Risk Factors**

 

Not applicable

 

**Item1B.  Unresolved Staff Comments**

 

None

 

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**Item2.  Properties.**

 

**Offices and Properties**

 

At December 31, 2008, the Company conducted itsbusiness from its executive offices in Broomall, Pennsylvania and eight fullservice offices, all of which are located in southeastern Pennsylvania.

 

The following table sets forth certain informationwith respect to the office and other properties of the Company at December 31,2008.

 
| **Description/Address**          | ** ** | **Leased/Owned** | ** ** | **Net Book  Value of  Premises and  Fixed Assets** | ** ** | **Amount of  Deposits** |   |
|----------------------------------|------------|------------------|------------|------------------------------------------------------------------------|------------|------------------------------|--------|
|                             |       |             |       | **(In Thousands)**                                                |       |
| MAIN OFFICE                      |       |             |       |                                                                   |       |                         |   |
|                             |       |             |       |                                                                   |       |                         |   |
| Lawrence Park                    |       | Owned            |       | $                                                                      | 1,726      |                         | $      | 69,658 |   |
| 541 Lawrence Road                |       |             |       |                                                                   |       |                         |   |
| Broomall, PA 19008               |       |             |       |                                                                   |       |                         |   |
|                             |       |             |       |                                                                   |       |                         |   |
| BRANCH OFFICES                   |       |             |       |                                                                   |       |                         |   |
|                             |       |             |       |                                                                   |       |                         |   |
| Upper Darby                      |       | Leased (1)       |       | 27                                                                     |       | 43,045                       |   |
| 69th and Walnut Sts              |       |             |       |                                                                   |       |                         |   |
| Upper Darby, PA 19082            |       |             |       |                                                                   |       |                         |   |
|                             |       |             |       |                                                                   |       |                         |   |
| Secane                           |       | Leased (2)       |       | 155                                                                    |       | 56,476                       |   |
| 925 Providence Road              |       |             |       |                                                                   |       |                         |   |
| Secane, PA 19018                 |       |             |       |                                                                   |       |                         |   |
|                             |       |             |       |                                                                   |       |                         |   |
| Newtown Square                   |       | Leased (3)       |       | 22                                                                     |       | 26,006                       |   |
| 252 & West Chester Pike |       |             |       |                                                                   |       |                         |   |
| Newtown Square, PA 19073         |       |             |       |                                                                   |       |                         |   |
|                             |       |             |       |                                                                   |       |                         |   |
| Havertown                        |       | Leased (4)       |       | 108                                                                    |       | 46,693                       |   |
| 500 E. Township Line Road        |       |             |       |                                                                   |       |                         |   |
| Havertown, PA 19083              |       |             |       |                                                                   |       |                         |   |
|                             |       |             |       |                                                                   |       |                         |   |
| Lansdowne                        |       | Owned            |       | 77                                                                     |       | 22,972                       |   |
| 9 E. Baltimore Pike              |       |             |       |                                                                   |       |                         |   |
| Lansdowne, PA 19050              |       |             |       |                                                                   |       |                         |   |
|                             |       |             |       |                                                                   |       |                         |   |
| Springfield                      |       | Leased (5)       |       | 426                                                                    |       | 38,116                       |   |
| 153 Saxer Avenue                 |       |             |       |                                                                   |       |                         |   |
| Springfield, PA 19064            |       |             |       |                                                                   |       |                         |   |
|                             |       |             |       |                                                                   |       |                         |   |
| Shoppes at Brinton Lake          |       | Leased (6)       |       | 170                                                                    |       | 20,005                       |   |
| 979 Baltimore Pike               |       |             |       |                                                                   |       |                         |   |
| Glen Mills, PA 19342             |       |             |       |                                                                   |       |                         |   |
|                             |       |             |       |                                                                   |       |                         |   |
| Paoli Shopping Center            |       | Leased (7)       |       | 53                                                                     |       | 8,730                        |   |
| 82 E. Lancaster Ave.             |       |             |       |                                                                   |       |                         |   |
| Paoli, PA 19301                  |       |             |       |                                                                   |       |                         |   |
|                                  |            |                  |            |                                                                        |            |                              |        |  |  |

 

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(1) The lease expires in February 2010.

 

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

 

(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 lease expires in January 2011 withtwo successive options to extend the lease for five years each.

 

(5) The lease expires in September 2015.

 

(6) The lease expires in January 2021 withtwo successive options to extend the lease for five years each.

 

(7) The lease expires May 2012.

 

**Item3.  Legal Proceedings.**

 

The Company is not involved in any pending legal proceedingsother than nonmaterial legal proceedings occurring in the ordinary course ofbusiness.

 

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

 

Not applicable.

 

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**PART II.**

 

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

 

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

 

**Item 6.  Selected Financial Data.**

 

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

##### *** ***

Theselected consolidated financial and other data of Alliance Bancorp, Inc.of Pennsylvania set forth below does not purport to be complete and should beread in conjunction with, and is qualified in its entirety by, the moredetailed information, including the Consolidated Financial Statements andrelated Notes, appearing elsewhere in this Annual Report.

 
| ** **                                                                         | ** ** | **As of or For the Year Ended December 31,** | ** **  |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|-------------|
| **(Dollars in thousands, except per share amounts)** | ** ** | **2008**                                                                             | ** **  | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Selected  Financial Data**                                                       |       |                                                                                 | ** **  |   |   |   |   |   |   |   |   |
| Total assets                                                                       | ** ** | **$**                                                                                | **424,110** | ** ** | $ | 424,467 |   | $ | 410,350 |   | $ | 389,035 |   | $ | 382,134 |   |
| Cash and cash  equivalents                                                         | ** ** | **28,308**                                                                           | ** **  | 42,079 |   | 48,283 |   | 20,956 |   | 22,137 |   |
| Loans  receivable, net                                                             | ** ** | **278,437**                                                                          | ** **  | 256,932 |   | 235,761 |   | 224,294 |   | 209,712 |   |
| Loans held for  sale                                                               | ** ** | **—**                                                                           | ** **  | — |   | 125 |   | — |   | 565 |   |
| Mortgage-backed  securities                                                        | ** ** | **31,921**                                                                           | ** **  | 35,632 |   | 43,636 |   | 48,362 |   | 31,497 |   |
| Investment  securities                                                             | ** ** | **62,070**                                                                           | ** **  | 67,861 |   | 59,305 |   | 72,079 |   | 93,897 |   |
| Other real estate  owned                                                           |       | —                                                                               | ** **  | — |   | — |   | 1,795 |   | 3,475 |   |
| Deposits                                                                           | ** ** | **331,701**                                                                          | ** **  | 330,788 |   | 333,802 |   | 297,710 |   | 286,906 |   |
| Other borrowed  money (1)                                                          | ** ** | **37,198**                                                                           | ** **  | 37,042 |   | 37,172 |   | 52,501 |   | 56,317 |   |
| Stockholders’  equity                                                         | ** ** | **48,899**                                                                           | ** **  | 51,458 |   | 33,500 |   | 34,127 |   | 35,046 |   |
| Non-performing  assets (2)                                                         | ** ** | **6,996**                                                                            | ** **  | 2,097 |   | 1,559 |   | 3,735 |   | 5,441 |   |
|                                                                               | ** ** | ** **                                                                           | ** **  |   |   |   |   |   |   |   |   |
| **Selected  Operating Data**                                                       |       |                                                                                 | ** **  |   |   |   |   |   |   |   |   |
| Interest and  dividend income                                                      | ** ** | **$**                                                                                | **22,543**  | ** ** | $ | 24,340 |   | $ | 21,752 |   | $ | 19,883 |   | $ | 19,419 |   |
| Interest expense                                                                   | ** ** | **11,702**                                                                           | ** **  | 13,999 |   | 11,331 |   | 8,907 |   | 7,820 |   |
| Net interest  income                                                               | ** ** | **10,841**                                                                           | ** **  | 10,341 |   | 10,421 |   | 10,976 |   | 11,599 |   |
| Provision for  loan losses                                                         | ** ** | **585**                                                                              | ** **  | 120 |   | 60 |   | 120 |   | 210 |   |
| Net interest  income after provision for loan losses                               |       | **10,256**                                                                           | ** **  | 10,221 |   | 10,361 |   | 10,856 |   | 11,389 |   |
| Other income                                                                       | ** ** | **241**                                                                              | ** **  | 484 |   | 1,452 |   | 1,133 |   | 1,444 |   |
| Other expenses                                                                     | ** ** | **10,303**                                                                           | ** **  | 9,807 |   | 10,509 |   | 10,972 |   | 10,385 |   |
| Income before  income taxes (benefit)                                              | ** ** | **194**                                                                              | ** **  | 898 |   | 1,304 |   | 1,017 |   | 2,448 |   |
| Income tax  (benefit) expense                                                      | ** ** | **(411**                                                                             | **)**       | (157 | ) | (67 | ) | (157 | ) | 329 |   |
| Net income                                                                         | ** ** | **$**                                                                                | **605**     | ** ** | $ | 1,055 |   | $ | 1,371 |   | $ | 1,174 |   | $ | 2,119 |   |
|                                                                               | ** ** | ** **                                                                           | ** **  |   |   |   |   |   |   |   |   |
| Basic earnings  per share (4)                                                      | ** ** | **$**                                                                                | **0.09**    | ** ** | $ | 0.15 |   | $ | 0.19 |   | $ | 0.16 |   | $ | 0.23 |   |

 

(Footnotes onFollowing Page)

 

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| ** **                                                                                        | ** ** | **As of or For the Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2008**                                                                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Selected  Operating Ratios**                                                                    |       |                                                                                 | ** ** |   |   |   |   |   |   |   |   |
| Average yield  earned on interest-earning assets                                                  |       | **5.64**                                                                             | **%**      | 6.12 | % | 5.89 | % | 5.43 | % | 5.41 | % |
| Average rate  paid on interest-bearing liabilities                                                |       | **3.32**                                                                             | ** ** | 4.03 |   | 3.39 |   | 2.69 |   | 2.41 |   |
| Average interest  rate spread (3)                                                                 | ** ** | **2.32**                                                                             | ** ** | 2.09 |   | 2.50 |   | 2.74 |   | 3.00 |   |
| Net interest  margin (3)                                                                          | ** ** | **2.72**                                                                             | ** ** | 2.60 |   | 2.82 |   | 3.00 |   | 3.23 |   |
| Ratio of  interest-earning assets to interest-bearing liabilities                                 |       | **113.54**                                                                           | ** ** | 114.54 |   | 110.66 |   | 110.74 |   | 110.52 |   |
| Noninterest  expense as a percent of average assets                                               |       | **2.44**                                                                             | ** ** | 2.33 |   | 2.69 |   | 2.89 |   | 2.73 |   |
| Return on  average assets                                                                         | ** ** | **0.14**                                                                             | ** ** | 0.25 |   | 0.35 |   | 0.30 |   | 0.56 |   |
| Return on  average equity                                                                         | ** ** | **1.21**                                                                             | ** ** | 2.18 |   | 4.05 |   | 3.39 |   | 5.99 |   |
| Dividend payout  ratio                                                                            | ** ** | **122.91**                                                                           | ** ** | 58.56 |   | 90.39 |   | 105.54 |   | 58.47 |   |
| Efficiency ratio  (5)                                                                             | ** ** | **92.97**                                                                            | ** ** | 90.60 |   | 88.51 |   | 90.61 |   | 79.62 |   |
| Ratio of average  equity to average assets                                                        | ** ** | **11.79**                                                                            | ** ** | 11.52 |   | 8.68 |   | 8.94 |   | 9.31 |   |
| Full-service  offices at end of period                                                            | ** ** | **9**                                                                                | ** ** | 9 |   | 9 |   | 8 |   | 8 |   |
|                                                                                              | ** ** | ** **                                                                           | ** ** |   |   |   |   |   |   |   |   |
| **Asset  Quality Ratios**                                                                         |       |                                                                                 | ** ** |   |   |   |   |   |   |   |   |
| Nonperforming  loans and troubled debt restructurings as a percent of total loans receivable  (2) |       | **2.48**                                                                             | ** ** | 0.81 |   | 0.65 |   | 0.85 |   | 0.92 |   |
| Nonperforming  assets as a percent of total assets (2)                                            |       | **1.65**                                                                             | ** ** | 0.49 |   | 0.38 |   | 0.96 |   | 1.42 |   |
| Allowance for  loan losses as a percent of total loans receivable                                 |       | **1.13**                                                                             | ** ** | 1.09 |   | 1.14 |   | 1.18 |   | 1.22 |   |
| Allowance for  loan losses as a percent of nonperforming loans and troubled debt restructurings   |       | **45.30**                                                                            | ** ** | 135.00 |   | 174.39 |   | 137.63 |   | 132.65 |   |
| Net charge-offs  to average loans receivable outstanding during the period                        |       | **0.09**                                                                             | ** ** | 0.00 |   | 0.02 |   | 0.03 |   | 0.16 |   |
|                                                                                              |       | ** **                                                                           | ** ** |   |   |   |   |   |   |   |   |
| **Bank  Capital Ratios**                                                                          |       |                                                                                 | ** ** |   |   |   |   |   |   |   |   |
| Tier 1  risk-based capital ratio                                                                  | ** ** | **16.33**                                                                            | ** ** | 16.35 |   | 14.05 |   | 14.92 |   | 15.38 |   |
| Total risk-based  capital ratio                                                                   | ** ** | **17.47**                                                                            | ** ** | 17.38 |   | 15.12 |   | 16.06 |   | 16.52 |   |
| Tier 1 leverage  capital ratio                                                                    | ** ** | **10.67**                                                                            | ** ** | 10.52 |   | 8.98 |   | 9.02 |   | 9.21 |   |

 

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(1)         Other borrowed moneyconsists of Federal Home Loan Bank (“FHLB”) advances, demand notes issued tothe U.S. Treasury and, the Employee Stock Ownership Plan (“ESOP”) debt prior toconversion.

 

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

 

(3)         Interest rate spreadrepresents the difference between the weighted average yield oninterest-earning assets and the weighted average cost of interest-bearingliabilities, and net interest margin represents net interest income as apercentage of average interest-earning assets.

 

(4)         The calculation ofearnings per share for 2003 through 2006 has been adjusted for the exchange andadditional share issuance in the reorganization and offering completed on January 30,2007.

 

(5)         The efficiency ratio iscalculated by dividing other expenses by the sum of net interest income andother income.

 

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

 

**Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

**Overview**

 

Alliance Bancorp, Inc. of Pennsylvania is a bankholding company which own 100% of the capital stock of Alliance Bank (“Bank”)which is a community oriented savings bank headquartered in Broomall, Pennsylvania.  We operate a total of nine banking officeslocated in Delaware and Chester Counties, which are suburbs ofPhiladelphia.  Our primary businessconsists of attracting deposits from the general public and using those funds,together with funds we borrow, to originate loans to our customers and investin securities such as U.S. Government and agency securities, mortgage-backedsecurities and municipal obligations.  AtDecember 31, 2008, we had $424.1 million of total assets, $331.7 millionof total deposits and stockholders’ equity of $48.9 million.

 

On January 30, 2007, the Bank completed areorganization to a mid-tier holding company structure and the sale by themid-tier company, Alliance Bancorp, Inc. of Pennsylvania (“AllianceBancorp” or the “Company”) of shares of its common stock.  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 the Bank.  Eachshare of the Bank’s common stock was converted into 2.09945 shares of theCompany’s common stock.  The offeringresulted in approximately $16.5 million in net proceeds to the Company.

 

The Bank is primarily engaged in attracting depositsfrom the general public through its branch offices and using such depositsprimarily to (i) originate and purchase loans secured by first liens onsingle-family (one-to-four units) residential and commercial real estateproperties and (ii) invest in securities issued by the United States (“U.S.”)Government and agencies thereof, municipal and corporate debt securities andcertain mutual funds.  The Bank derivesits income principally from interest earned on loans, mortgage-backedsecurities and investments and, to a lesser extent, from fees received inconnection with the origination of loans and for other services.  The Bank’s primary expenses are interestexpense on deposits and borrowings and general operating expenses.  Funds for activities are provided primarilyby deposits, repayments and prepayments of outstanding loans andmortgage-backed securities and other sources.

 

The Bank is subject to regulation by the PennsylvaniaDepartment of Banking (the “Department”), as its chartering authority andprimary regulator, and by the Federal Deposit Insurance Corporation (the “FDIC”),which insures the Bank’s deposits up to applicable limits.

 

Certain highlights of our operating strategy are:

 

*Expanding our Market Presence*.  We have taken steps to increase our marketpenetration in our existing market areas by increasing the products andservices we offer, incentivizing our employees to cross-sell our products andemphasizing customer service in an effort to capture more of each customer’sbanking relationships.  In addition toorganic growth, we continue to evaluate market expansion opportunities.  Though net proceeds from the offering hasfacilitated our ability to consider additional new offices, either on a de novobasis or through acquisitions, we currently have no plans, agreements orunderstandings with respect to any acquisitions.

 

*Emphasizing Business Banking Operations. *We intend to hireadditional loan officers and have increased our calls on local builders andother local businesses in an effort to increase our business bankingrelationships.  As a locally based bank,we believe that we offer a high level of customer service and a quick loanapplication and approval process which is attractive to many local, small tomedium sized businesses.

 

*Emphasizing Commercial Real Estate and ConstructionLoans. *At December 31,2008, $123.5 million or 43.8% of our total loan portfolio consisted ofcommercial real estate loans.  Inaddition, at such date, we had $25.3 million of construction loans.  Commercial real estate and construction loansare attractive because they generally provide us with higher average yieldsthan single-family residential mortgage loans and they typically haveadjustable rates of interest and/or shorter terms to maturity than traditionalsingle-family residential mortgage loans. The net proceeds from the offering increased our capital and willfacilitate our ability to make larger commercial and construction loans,subject to our current underwriting guidelines. We intend to continue to emphasize growth in our commercial real estateand construction lending in a manner consistent with our loan underwritingpolicies and procedures.

 

*Considering New Product Lines.* We continue to evaluate new product lines inour efforts to offer a broader array of products and services to ourcustomers.  In particular, we continue toevaluate financial products which will increase our non-interest income.

 

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*Continuing Residential Mortgage Lending. *Historically, we were atraditional single-family residential mortgage lender, and we will continue tooffer traditional single-family residential loan products.  In recent periods, we have emphasized homeequity loans and lines of credit due to the shorter terms to maturity andadjustable interest rates which we generally offer on such products as well asconsumer demand for home equity loans and lines of credit.  At December 31, 2008, home equity loansand lines of credit amounted to $25.6 million or 9.1% of the total loanportfolio.

 

*Increasing Core Deposits. *We intend to increase ourcore deposits in order to reduce 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.

 

Our results of operations depend, to a large extent,on net interest income, which is the difference between the income earned on ourloan and securities portfolios and interest expense on deposits andborrowings.  Our net interest income islargely determined by our net interest spread, which is the difference betweenthe average yield earned on interest-earning assets and the average rate paidon interest-bearing liabilities, and the relative amounts of interest-earningassets and interest-bearing liabilities. Results of operations are alsoaffected by our provisions for loan losses, fees and service charges and othernon-interest income and non-interest expense. Non-interest expense principally consists of compensation and employeebenefits, office occupancy and equipment expense, data processing, advertisingand other expense.  Our results ofoperations are also significantly affected by general economic and competitiveconditions, particularly changes in interest rates, government policies andactions of regulatory authorities. Future changes in applicable law, regulations or government policies maymaterially impact our financial condition and results of operations.

 

Our net income amounted to $605,000 and $1.1 millionfor the years ended December 31, 2008 and 2007, respectively.  Some of the major factors and trends whichhave impacted our results in these periods include the following:

 

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

 

During 2008, the Company recognized $882,000 inimpairment charges on certain mutual funds compared to an $860,000 impairmentin 2007.  The Company attributes thelower valuations of these mutual funds to a significant widening of spreadsprimarily due to the mortgage-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 Interest Spread and NetInterest Margin.*  Ouraverage interest rate spread was 2.32% and 2.09% for the years ended December 31,2008 and 2007, respectively.  AllianceBank’s net interest margin, which is net interest income as a percentage ofaverage interest-earning assets, was 2.72% and 2.60% for the years ended December 31,2008 and 2007, respectively.  During2008, the Federal Reserve Board reduced the federal funds rate seven times from4.25% at December 31, 2007 to a range of 0% to 0.25% at December 31,2008.  The Company anticipates that thisdecrease will cause downward pressure on short term market interest rates.  Generally, a decreasing interest rateenvironment will reduce interest income earned on interest-earning assets andcause downward pressure on rates paid for interest bearing deposits.  However, interest rate changes generallyaffect 

 

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interest income on prime based loans and overnightdeposits almost immediately, while the impact on interest expense on customerdeposits is more gradual due to fixed term certificates of deposit and thehighly competitive environment in which the Company operates.  The Company anticipates that the currentfalling rate environment will continue to put downward pressure on short terminterest rates.   This decreasinginterest rate environment has resulted in pricing pressure on the Bank’sdeposit accounts as it attracts new customers and retains existing customers.

 

*Managing Non-Interest Expenses.*Our non-interest expenses amounted to $10.3 million and $9.8 million for theyears ended December 31, 2008 and 2007, respectively.  The increase was primarily due to a $219,000or 4.0% increase in salary and employee benefits and a $146,000 or 45.6%increase in advertising and marketing expenses. The increase in salaries andemployee benefits was attributed to a higher level of staff members and annualincreases in employees’ salaries.   Theincrease in advertising and marketing was attributed to the Company’s focus oncable television, media and newspaper advertising to increase the Bank’s visibility.

 

**CriticalAccounting Policies**

 

In reviewing andunderstanding financial information for the Company, you are encouraged to readand understand the significant accounting policies used in preparing ourconsolidated financial statements included elsewhere herein.  These policies are described in Note 2 of thenotes to our consolidated financial statements. The accounting and financial reporting policies of the Company conformto accounting principles generally accepted in the United States of America andto general practices within the banking industry.  Accordingly, the consolidated financialstatements require certain estimates, judgments, and assumptions, which arebelieved to be reasonable, based upon the information available.  These estimates and assumptions affect thereported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of income and expenses during the periodspresented.  The following accounting policiescomprise those that management believes are the most critical to aid in fullyunderstanding and evaluating our reported consolidated financial results.  These policies require numerous estimates oreconomic assumptions that may prove inaccurate or may be subject to variationswhich may significantly affect our reported results and financial condition forthe period or in future periods.

 

*Allowance for Loan Losses.*Theallowance for loan losses is established through a provision for loan lossescharged to expense.  Charges against theallowance for loan losses are made when management believes that thecollectibility of loan principal is unlikely. Subsequent recoveries are added to the allowance.  The allowance is an amount that managementbelieves will cover known and inherent losses in the loan portfolio, based onevaluations of the collectibility of loans. The evaluations take into consideration such factors as changes in thetypes and amount of loans in the loan portfolio, historical loss experience,adverse situations that may affect the borrower’s ability to repay, estimatedvalue of any underlying collateral, estimated losses relating to specificallyidentified loans, and current economic conditions.  This evaluation is inherently subjective asit requires material estimates including, among others, exposure at default,the amount and timing of expected future cash flows on impaired loans, value ofcollateral, estimated losses on our commercial and residential loan portfoliosand general amounts for historical loss experience.  All of these estimates may be susceptible tosignificant change.

 

While management uses the best information availableto make loan loss allowance evaluations, adjustments to the allowance may benecessary based on changes in economic and other conditions or changes inaccounting guidance.  Historically, ourestimates of the allowance for loan losses have not required significantadjustments from management’s initial estimates.  In addition, the Pennsylvania Department ofBanking and the FDIC, as an integral part of their examination 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 estimatesand judgments to calculate some of our tax liabilities and determine therecoverability of some of our deferred tax assets, which arise from temporarydifferences between the tax and financial statement recognition of revenues andexpenses.  We also estimate a deferredtax asset valuation allowance if, based on the available evidence, it is morelikely than not that some portion or all of the recorded deferred tax assetswill not be realized in future periods. These estimates and judgments are inherently subjective.  Historically, our estimates and judgments tocalculate our deferred tax accounts have not required significant revision toour initial estimates.

 

In evaluating our ability to recover deferred taxassets, we consider all available positive and negative evidence, including ourpast operating results, recent cumulative losses and our forecast of futuretaxable income.  In determining futuretaxable income, we make assumptions for the amount of taxable income, thereversal of temporary differences and the implementation of feasible andprudent tax planning strategies.  Theseassumptions require us to make judgments about our future taxable income andare consistent with the plans and estimates we use 

 

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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. *The Company is required toperform periodic reviews of individual securities in its investment portfolioto determine whether a decline in the fair value of a security is other thantemporary.  A review ofother-than-temporary impairment requires the Company to make certain judgmentsregarding the nature of the decline, its effect on the financial statements andthe probability, extent and timing of a valuation recovery and the Company’sintent and ability to hold the security. Management evaluates securities for other than temporary impairment onat least a quarterly basis, and more frequently when economic or marketconditions warrant such evaluations. Consideration is given to (1) the length of time and the extent towhich the fair value has been less than cost, (2) the financial conditionand near-term prospects of the issuer, and (3) the intent and ability ofthe Company to retain its investment in the issuer for a period of timesufficient to allow for any anticipated recovery in fair value.  If the decline in the market value of asecurity is determined to be other than temporary we would recognize thedecline as a realized loss on the income statement.

 

**Financial Condition**

 

The Bank’s total assets decreased $357,000 or 0.10% to$424.1 million at December 31, 2008, compared to $424.5 million at December 31,2007.  This decrease can be attributed toa $13.8 million or 32.7% decrease in cash and cash equivalents, a $7.8 millionor 17.1% decrease in investment securities available for sale, and a $3.7million or 10.4% decrease in mortgage backed securities.  These decreases were offset by a $21.5million or 8.4% increase in loans receivable and a $2.0 million or 9.0%increase in investment securities held to maturity.  The decrease in cash and cash equivalents wasdue to the funding of new loans as well as the increase in investmentsecurities held to maturity.  Thedecrease in investment securities available for sale was primarily due tosales, calls and maturities within the portfolio and the Bank not reinvestingin these instruments at the same levels of the calls and maturities.  The decrease in mortgage backed securitieswas due to principal repayments which exceeded new purchases.  The proceeds from these principal repaymentson mortgage-backed securities as well as calls and maturities on investmentsecurities available for sale were used to fund loan growth.  New loan production amounted to $75.1 millionfor 2008 and included $29.1 million in residential and consumer lending, $28.6million in commercial and business lending and $17.4 million in real estateconstruction lending. In addition, the Bank generally sells all fixed-rateresidential loan originations, including servicing, with terms of 15 years ormore in the secondary market. Such loans sold amounted to $1.4 million in2008.  The Bank’s net loans receivableoutstanding at December 31, 2008 grew $21.5 million or 8.4% to $278.4million as compared to $256.9 million at December 31, 2007.  The Bank remains committed to continuing itslending emphasis on developing and growing new and existing relationships withboth retail and commercial customers.

 

Total liabilities increased $2.2 million or 0.6% to$375.2 million at December 31, 2008, compared to $373.0 million at December 31,2007.  This increase was primarily due toan increase of $4.1 million or 1.3% in interest bearing deposits.  The increase was partially offset by a $3.2million or 19.2% decrease in non interest-bearing deposits.  Stockholders’ equity decreased $2.6 millionor 5.0% to $48.9 million as of December 31, 2008 compared to $51.5 millionat December 31, 2007.  Beginning January 31,2008, the Company commenced a stock repurchase program and has repurchased267,324 shares of common stock at an average price of $8.93 per share, whichdecreased stockholders’ equity by $2.4 million.

 

The Bank’s nonperforming assets, which consist ofnonaccruing loans, accruing loans 90 days or more delinquent and other realestate owned (which includes real estate acquired through, or in lieu of,foreclosure) increased to $7.0 million or 1.65% of total assets at December 31,2008 from $2.1 million or 0.49% of total assets at December 31, 2007.  At December 31, 2008, the Bank’s $7.0million of nonperforming assets consisted of $1.8 million of accruing loans 90days or more delinquent, $5.2 million of nonaccrual loans and no OREO.  At December 31, 2008, nonperformingloans consisted of $2.5 million in single-family residential real estate loans,$3.6 million in commercial real estate loans, $896,000 in real estateconstruction loans, and $75,000 in consumer and other loans.  The Bank’s management continues toaggressively pursue the collection and resolution of all delinquent loans.  At December 31, 2007, nonperformingloans consisted of $1.7 million in single-family residential real estate loans,$416,000 in commercial real estate loans, and $32,000 in consumer and otherloans.  The Bank’s management continuesto aggressively pursue the collection and resolution of all delinquent loans.

 

At December 31, 2008, the Bank’s total allowancefor loan losses amounted to $3.2 million, as compared to $2.8 million at December 31,2007.  The increase was due to $585,000in provisions to maintain an appropriate allowance level in light of factorssuch as the level of nonperforming loans and the current economicenvironment.  

 

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In addition, in 2008, the Bank’s net charge-offsamounted to $247,000.  At December 31,2008, the Bank’s allowance for loan losses amounted to 45.3% of totalnonperforming loans and 1.13% of total loans receivable, as compared to 135.0%and 1.09%, respectively, at December 31, 2007.   The decrease in the allowance for loan lossesto total nonperforming loans was due to our analysis of the underlying realestate collateral securing these loans which warranted little in additionalreserves in most cases.

 

Although management uses the best informationavailable to make determinations with respect to the provisions for loanlosses, additional provisions for loan losses may be required to be establishedin the future should economic or other conditions change substantially.  In addition, the Pennsylvania Department ofBanking and the FDIC, as an integral part of their examination process,periodically review the Bank’s allowance for loan losses.  Such agencies may require the Bank torecognize 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 $605,000 forthe year ended December 31, 2008 as compared to net income of $1.1 millionin 2007.  Net interest income increased$500,000 for the year ended December 31, 2008, compared to 2007, primarilydue to a $2.3 million decrease in interest expense as a result of decreasinginterest rates paid on deposits during 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 decreased $243,000 or 50.2% forthe year ended December 31, 2008, compared to 2007.  This decrease is primarily attributable to a$157,000 loss on sale of investment securities. Other expenses increased by $495,000 or 5.1% for the year ended December 31,2008, compared to 2007.  This increase isprimarily due to increases in salaries and employee benefits expense and anincrease in advertising and marketing when comparing 2008 to 2007.  The increase in salaries and employeebenefits was attributed to a higher level of staff members and annual increasesin employees’ salaries.  The increase inadvertising and marketing was attributed to the Company’s focus on cable television,media and newspaper advertising to increase the Banks visibility. The provisionfor loan losses increased $465,000 primarily due to increases in loansreceivable and nonperforming loans.  For2008, the Company recorded a $411,000 income tax benefit compared to a $157,000tax benefit for 2007.  The income taxbenefit increased due to a lower amount of pretax income for the year ended December 31,2008, compared to 2007.

 

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**Average Balances, Net Interest Income and YieldsEarned and Rates Paid.** The following average balance sheet table sets forth for the periodsindicated, information on the Bank regarding: (i) the total dollar amounts of interest income on interest-earningassets and the resulting average yields; (ii) the total dollar amounts ofinterest expense on interest-bearing liabilities and the resulting averagecosts; (iii) net interest income; (iv) interest rate spread; (v) netinterest-earning assets (interest-bearing liabilities); (vi) the net yieldearned on interest-earning assets; and (vii) the ratio of totalinterest-earning assets to total interest-bearing liabilities.  Information is based on average dailybalances during the periods presented.

 
| ** **                                                        | ** ** | **At  Dec. 31,** | ** ** | **Year Ended December 31,** | ** **  |
|-------------------------------------------------------------------|------------|-----------------------|------------|--------------------------------------------|-------------|
| ** **                                                        | ** ** | **2008**              | ** ** | **2008**                                   | ** **  | **2007** | ** ** | **2006** | ** ** |
| ** **                                                        | ** ** | **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)                                    | ** ** | **6.20**              | **%**      | **$**                                      | **271,859** | ** ** | **$** | **17,485** | ** ** | **6.43** | **%** | $ | 247,157 |   | $ | 16,966 |   | 6.86 | % | $ | 232,520 |   | $ | 15,534 |   | 6.68 | % |
| Mortgage-backed securities                                        |       | **4.80**              | ** ** | **32,531**                                 | ** **  | **1,493** | ** ** | **4.59** | ** ** | 39,660 |   | 1,816 |   | 4.58 |   | 47,342 |   | 2,184 |   | 4.61 |   |
| Investment  securities (4)                                        | ** ** | **5.11**              | ** ** | **59,568**                                 | ** **  | **2,852** | ** ** | **4.79** | ** ** | 64,983 |   | 3,333 |   | 5.13 |   | 70,927 |   | 3,219 |   | 4.54 |   |
| Other  interest-earning assets                                    |       | **0.39**              | ** ** | **36,021**                                 | ** **  | **712** | ** ** | **1.98** | ** ** | 46,200 |   | 2,225 |   | 4.82 |   | 18,532 |   | 815 |   | 4.40 |   |
| Total  interest-earning assets                                    |       | **5.61**              | ** ** | **399,979**                                | ** **  | **22,542** | ** ** | **5.64** | ** ** | 398,000 |   | 24,340 |   | 6.12 |   | 369,321 |   | 21,752 |   | 5.89 |   |
| Noninterest-earning  assets                                       | ** ** | ** **            | ** ** | **23,028**                                 | ** **  | ** ** | ** ** | ** ** | ** ** | 22,741 |   |   |   |   |   | 20,942 |   |   |   |   |   |
| Total assets                                                      | ** ** | ** **            | ** ** | **$**                                      | **423,007** | ** ** | ** ** | ** ** | ** ** | ** ** | $ | 420,741 |   |   |   |   |   | $ | 390,263 |   |   |   |   |   |
|                                                              | ** ** | ** **            | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing  liabilities:**                                |       | ** **            | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                          | ** ** | **2.42**              | ** ** | **$**                                      | **314,457** | ** ** | **9,331** | ** ** | **2.97** | ** ** | $ | 310,112 |   | 11,618 |   | 3.75 |   | $ | 285,768 |   | 8,350 |   | 2.92 |   |
| FHLB advances and  other borrowings                               |       | **6.30**              | ** ** | **37,815**                                 | ** **  | **2,370** | ** ** | **6.27** | ** ** | 37,356 |   | 2,381 |   | 6.37 |   | 47,990 |   | 2,981 |   | 6.21 |   |
| Total  interest-bearing liabilities                               |       | **2.82**              | ** ** | **352,272**                                | ** **  | **11,701** | ** ** | **3.32** | ** ** | 347,468 |   | 13,999 |   | 4.03 |   | 333,758 |   | 11,331 |   | 3.39 |   |
| Noninterest-bearing  liabilities                                  |       | ** **            | ** ** | **20,883**                                 | ** **  | ** ** | ** ** | ** ** | ** ** | 24,800 |   |   |   |   |   | 22,617 |   |   |   |   |   |
| Total liabilities                                                 | ** ** | ** **            | ** ** | **373,155**                                | ** **  | ** ** | ** ** | ** ** | ** ** | 372,268 |   |   |   |   |   | 356,375 |   |   |   |   |   |
| Stockholders’  equity                                        | ** ** | ** **            | ** ** | **49,852**                                 | ** **  | ** ** | ** ** | ** ** | ** ** | 48,473 |   |   |   |   |   | 33,888 |   |   |   |   |   |
| Total liabilities  and stockholders’ equity                  |       | ** **            | ** ** | **$**                                      | **423,007** | ** ** | ** ** | ** ** | ** ** | ** ** | $ | 420,741 |   |   |   |   |   | $ | 390,263 |   |   |   |   |   |
|                                                              |       | ** **            | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  interest-earning assets                                      | ** ** | ** **            | ** ** | **$**                                      | **47,707**  | ** ** | ** ** | ** ** | ** ** | ** ** | $ | 50,532 |   |   |   |   |   | $ | 35,563 |   |   |   |   |   |
| Net interest  income/interest rate spread                         |       | **2.79**              | **%**      | ** **                                 | ** **  | **$** | **10,841** | ** ** | **2.32** | **%** |   |   | $ | 10,341 |   | 2.09 | % |   |   | $ | 10,421 |   | 2.50 | % |
| Net yield on  interest-earning assets (3) (4)           |       | ** **            | ** ** | ** **                                 | ** **  | ** ** | ** ** | **2.72** | **%** |   |   |   |   | 2.60 | % |   |   |   |   | 2.82 | % |
| Ratio of  interest-earning assets to interest-bearing liabilities |       | ** **            | ** ** | ** **                                 | ** **  | ** ** | ** ** | **113.54** | **%** |   |   |   |   | 114.54 | % |   |   |   |   | 110.66 | % |

 

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(1)          Includes loans held forsale.

(2)          Nonaccrualloans and loan fees have been included.

(3)          Netinterest income divided by interest-earning assets.

(4)          The indicated yields arenot reflected on a tax equivalent basis.

 

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**Rate/Volume analysis. **The following tabledescribes the extent to which changes in interest rates and changes in volumeof interest-related assets and liabilities have affected the Bank’s interestincome and expense during the periods indicated.  For each category of interest-earning assetsand interest-bearing liabilities, information is provided on changesattributable to (i) changes in volume (change in volume multiplied byprior year rate), (ii) changes in rate (change in rate multiplied by prioryear volume), and (iii) total change in rate and volume.  The combined effect of changes in both rateand volume has been allocated proportionately to the change due to rate and thechange due to volume.

 
| ** **                                  | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                  | ** ** | **2008 vs. 2007**                | ** ** |
| ** **                                  | ** ** | **Increase**                               | ** ** |
| ** **                                  | ** ** | **(Decrease) Due To**            | ** ** |
| ** **                                  | ** ** | ** **                                 | ** ** | ** ** | ** ** | **Total** | ** ** |
| ** **                                  | ** ** | ** **                                 | ** ** | ** ** | ** ** | **Increase** | ** ** |
| **(Dollars in Thousands)**        | ** ** | **Rate**                                   | ** ** | **Volume** | ** ** | **(Decrease)** | ** ** |
| **Interest-earning  assets:**               |       |                                       |       |   |   |   |   |
| ** **                                  |       |                                       |       |   |   |   |   |
| Loans receivable                            | ** ** | **$**                                      | **(1,368** | **)** | **$** | **1,887** | ** ** | **$** | **519** | ** ** |
| Mortgage-backed  securities                 | ** ** | **4**                                      | ** ** | **(327** | **)** | **(323** | **)** |
| Investment  securities                      | ** ** | **(211**                                   | **)**      | **(270** | **)** | **(481** | **)** |
| Other  interest-earning assets              | ** ** | **(1,233**                                 | **)**      | **(280** | **)** | **(1,513** | **)** |
| Total  interest-earning assets              | ** ** | **(2,809**                                 | **)**      | **1,011** | ** ** | **(1,798** | **)** |
|                                        | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest-bearing  liabilities:**          |       |                                       |       |   |   |   |   |
| ** **                                  |       |                                       |       |   |   |   |   |
| Deposits                                    | ** ** | **(2,417**                                 | **)**      | **130** | ** ** | **(2,287** | **)** |
| FHLB advances  and other borrowings         | ** ** | **(39**                                    | **)**      | **29** | ** ** | **(11** | **)** |
| Total interest-bearing  liabilities         | ** ** | **(2,445**                                 | **)**      | **148** | ** ** | **(2,297** | **)** |
|                                        | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Increase  (decrease) in net interest income | ** ** | **$**                                      | **(364**   | **)** | **$** | **863** | ** ** | **$** | **500** | ** ** |

 

**Net Interest Income.**  Net interest income is determined by the Bank’sinterest rate spread (i.e., the difference between the yields earned on itsinterest-earning assets and the rates paid on its interest-bearing liabilities)and the relative amounts of interest-earning assets and interest-bearingliabilities.  Net interest incomeincreased $500,000 or 4.8% to $10.8 million for the year ended December 31,2008 compared to 2007. This increase was primarily due to a decrease in ratespaid on interest bearing deposits and an increase in interest income on loans,partially offset by a decrease in the interest income on investment securitiesand a decrease in the interest income on balances from depository institutions.

 

**Interest and Dividend Income.**  Interest income decreased $1.8 million or7.4% to $22.5 million for the year ended December 31, 2008, compared tothe same period in 2007.  The decreasewas primarily due to a $1.5 million or 68.0% decrease in interest income onbalances due from depository institutions, a $481,000 or 14.4% decrease ininterest income on investment securities, and a $323,000 or 17.7% decrease ininterest income earned on mortgage backed securities.  These decreases were offset by a $519,000 or3.1% increase in interest income earned on loans.  The decrease in interest due from depositoryinstitutions was due to a $10.2 million or 22.0% decrease in the average balanceof balances due from depository institutions and a 284 or 59.0% basis point(one basis point is equal to 1/100 of a percent) decrease in the average yieldearned on balances due from depository institutions.  The decrease in interest income on investmentsecurities was due to a $5.4 million or 8.3% decrease in average balance ofinvestment securities and a 34 or 6.6% basis point decrease in the averageyield earned on investment securities. The decrease in interest income on mortgage backed securities wasprimarily due to a $7.1 million or 18.0% decrease in the average balance ofmortgage backed securities, partially offset by a 1 or 0.2% basis pointincrease in the average yield earned on mortgage backed securities.  The increase in interest income on loans wasprimarily due to a $24.7 million or 10.0% increase in the average balance ofloans outstanding, partially offset by a 43 or 6.3% basis point decrease in theaverage yield earned on loans.

 

**Interest Expense.**  Interest expense decreased $2.3 million or16.4% to $11.7 million for the year ended December 31, 2008, compared tothe same period in 2007.  This decreasewas primarily due to a decrease of $2.3 million or 

 

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19.7% in interest expense on deposits and a decreaseof $11,000 or 0.4% in interest expense on FHLB advances and otherborrowings.  The decrease in interestexpense on deposits was primarily due to a 78 or 20.8% basis point decrease inthe average rate paid partially offset by a $4.3 million or 1.4% increase inthe average balance outstanding.  Thedecrease in interest expense on FHLB advances and other borrowings was due toan 11 or 1.7% basis point decrease in the average rates paid, partially offsetby $459,000 or 1.2% increase in the average balance outstanding.

 

**Provision for Loan Losses. **The Bank establishesprovisions for loan losses, which are charges to operating results, in order tomaintain a level of total allowance for loan losses that management believes,to the best of its knowledge, covers all known and inherent losses that areboth probable and reasonably estimable, at each reporting date.  The allowance is based upon an assessment ofprior loss experience, the volume and type of lending conducted by the Bank,industry standards, past due loans, current economic conditions in the Bank’smarket area and other factors related to the collectibility of the Bank’s loanportfolio.  The provision for loan lossesamounted to $585,000 and $120,000 for the years ended December 31, 2008and 2007, respectively.

 

**Other Income.**  Total other income decreased $243,000 or50.2% to $241,000 for the year ended December 31, 2008, compared to thesame period in 2007.  This decrease isprimarily attributed to a $157,000 loss on sale of securities from the sale ofapproximately $15.8 million of certain mutual funds.  During 2008, the Company recognized $882,000in impairment charges on these mutual funds compared to an $860,000 impairmentin 2007.  The Company attributes thelower valuations of these mutual funds to a significant widening of spreadsprimarily due to the mortgage-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.  In 2007, theBank recognized a gain on sale of other real estate owned of $21,000 comparedto no gain or loss for the comparable period in 2008.  The Bank has collected a management fee fromAlliance Mutual Holding Company which reimburses the Bank for certain salaryand overhead costs the Bank incurs on behalf of the mutual holding company.  The management fees for 2008 and 2007 were$384,000 and $420,000, respectively.

 

**Other Expenses.**  Our non-interest expenses amounted to $10.3million and $9.8 million for the years ended December 31, 2008 and 2007,respectively.  The increase in 2008 wasprimarily due to a $219,000 or 4.0% increase in salary and employee benefitsand a $145,000 or 45.6% increase in advertising and marking expenses.  The increase in salaries and employeebenefits was attributed to a higher level of staff members and annual increasesin employees’ salaries.   The increase inadvertising and marketing was attributed to the Company’s focus on cabletelevision, media and newspaper advertising to increase the Bank’s visibility.

 

**Income Tax Expense (Benefit).**  Income tax benefit amounted to $411,000 and$157,000 for the years ended December 31, 2008 and 2007, respectively,resulting in effective tax rates of (211.6)% and (17.5)%, respectively.  The increase in income tax benefit for theyear ended December 31, 2008 was primarily due to lower pre-tax income in2008 compared to 2007 and by higher tax-exempt income from securities whencompared to 2007.  The negative effectivetax rates primarily resulted from tax exempt income from Bank-owned lifeinsurance and certain tax-exempt securities purchased 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 31,2008, the Bank had $37.0 million of outstanding advances and $147.7 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.  FHLB stock is requiredto be held when advances from the FHLB are taken.  Further, the Bank has access to the FederalReserve Bank discount window.  At December 31,2008, the Bank had no such funds outstanding from the Federal Reserve Bank.

 

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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, 2008, the total approvedloan commitments outstanding amounted to $6.4 million.  At the same date, commitments under unusedlines of credit amounted to $31.6 million. Certificates of deposit scheduled to mature in one year or less at December 31,2008, totaled $155.6 million.  Managementbelieves that a significant portion of maturing deposits will remain with theBank.  Investment and mortgage-backedsecurities totaled $94.0 million at December 31, 2008, of which $7.9million 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, 2008.

 
| **(Dollars in Thousands)**                    | ** ** | ** **    | ** ** |
|---------------------------------------------------------|------------|---------------|------------|
|                                                    |       |          |       |
| Total stockholder’s equity or GAAP capital (Bank)  |       | $             | 44,419     |   |
| FDIC adjustment  for securities available-for-sale      |       | (626          | )          |
| FDIC adjustment  for retirement plans                   |       | 1,556         |       |
| FDIC tier 1  capital                                    |       | 45,349        |       |
| Plus:  FDIC tier 2 capital (1)                     |       | 3,169         |       |
| Total FDIC  risk-based capital                          |       | $             | 48,518     |   |
|                                                    |       |          |       |
| FDIC quarterly  average total assets for leverage ratio |       | $             | 425,183    |   |
| FDIC net  risk-weighted assets                          |       | 277,670       |       |
|                                                    |       |          |       |
| FDIC leverage  capital ratio                            |       | 10.67         | %          |
| Minimum  requirement (2)                                |       | 4.00% to 5.00 | %          |
|                                                    |       |          |       |
| FDIC risk-based  capital - tier 1                       |       | 16.33         | %          |
| Minimum  requirement                                    |       | 4.00          | %          |
|                                                    |       |          |       |
| FDIC total  risk-based capital (tier 1 & 2)    |       | 17.47         | %          |
| Minimum  requirement                                    |       | 8.00          | %          |

 

----

(1) Tier 2capital consists entirely of the allowable portion of the allowance for loanlosses, which is limited to 1.25% of total risk-weighted assets as detailedunder regulations of the FDIC.

 

(2) The FDIChas indicated that most highly rated institutions which meet certain criteriawill be required to maintain a ratio of 3%, and all other institutions will berequired to maintain an additional cushion of 100 to 200 basis points. As of December 31,2008, the Bank had not been advised of any additional requirements in thisregard.

 

**Recent Accounting Pronouncements**

 

FASB statement No. 141 (R) “BusinessCombinations” was issued in December of 2007. This Statement establishesprinciples and requirements for how the acquirer of a business recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, and any noncontrolling interest in the acquiree. TheStatement also provides guidance for recognizing and measuring the goodwillacquired in the business combination and determines what information todisclose to enable users of the financial statements to evaluate the nature andfinancial effects of the business combination. The guidance will becomeeffective as of the beginning of a company’s fiscal year beginning after December 15,2008. This new pronouncement will impact the Company’s accounting for anybusiness combinations after December 31, 2008.

 

In February 2007, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities-Including an amendment of FASBStatement No. 115”. SFAS No. 159 permits entities to choose tomeasure many financial instruments and certain other items at fair value.Unrealized gains and losses on items for which the fair value option has beenelected will be recognized in earnings 

 

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at each subsequent reporting date. SFAS No. 159is effective for the Company on January 1, 2009. The implementation ofthis standard is not expected to have an impact on the Company’s consolidatedfinancial position or results of operations.

 

In December 2008, the FASB issued FSP FAS132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”.  ThisFSP amends SFAS 132(R), “Employers’ Disclosures about Pensions and OtherPostretirement Benefits”, to provide guidance on an employer’s disclosuresabout plan assets of a defined benefit pension or other postretirementplan.  The disclosures about plan assets required by this FSP shallbe provided for fiscal years ending after December 15,2009.  The Company is currently reviewing the effect this newpronouncement will have on its consolidated financial 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 ofthe Company with respect to future looking events and are subject to certainrisks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or shouldunderlying assumptions prove incorrect actual results may vary materially fromthose described herein as anticipated, believed, estimated, expected orintended.  The Company does not intend toupdate these forward-looking statements.

 

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**Item8.  Financial Statements andSupplementary Data.**

 

**Report of IndependentRegistered Public Accounting Firm**

** **

Tothe Board of Directors andStockholders of Alliance Bancorp, Inc. of Pennsylvania

 

We have audited the accompanying consolidated statement offinancial condition of Alliance Bancorp, Inc. of Pennsylvania andsubsidiaries (the “Company”) as of December 31, 2008 and 2007, and therelated statements of income, changes in stockholders’ equity and cash flowsfor the years then ended. Alliance Bancorp, Inc. of Pennsylvania’smanagement is responsible for these financial statements. Our responsibility isto express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards ofthe Public 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 31,2008 and 2007, and the results of their operations and their cash flows for theyears then ended in conformity with accounting principles generally accepted inthe United States of America.

 

 
| /s/ Beard Miller Company LLP |   |
|------------------------------|--------|
|                         |   |
|                         |   |
| Beard Miller Company LLP     |   |
| Malvern, Pennsylvania        |   |
| March 12, 2009          |   |

 

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIALREPORTING

 

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

 

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

 

Under the supervision and with the participation ofmanagement, including our principal executive officer and principal financialofficer, we conducted an evaluation of the effectiveness of our internalcontrol over financial reporting based on the framework in Internal Control —Integrated Framework issued by the Committee of Sponsoring Organizationsof the Treadway Commission. Based on our evaluation under the framework inInternal Control — Integrated Framework, management concluded thatour internal control over financial reporting was effective as of December 31,2008.

 

Thisannual report does not include an attestation report of the company’sindependent registered public accounting firm regarding internal control overfinancial reporting. Management’s report was not subject to attestation by thecompany’s independent 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.

 

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

**Consolidated Statements of Financial Condition**

 
| ** **                                                                                                                    | ** ** | **December 31,** | ** **      |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-----------------|
| ** **                                                                                                                    | ** ** | **2008**              | ** **      | **2007** | ** ** |
| **Assets**                                                                                                                    | ** ** | ** **            | ** **      |   |   |
|                                                                                                                          | ** ** | ** **            | ** **      |   |   |
| Cash and cash  due from depository institutions                                                                               | ** ** | **$**                 | **7,849,024**   | ** ** | $ | 3,917,772 |   |
| Interest bearing  deposits with depository institutions                                                                       | ** ** | **20,458,632**        | ** **      | 38,161,428 |   |
| Total cash and  cash equivalents                                                                                              | ** ** | **28,307,656**        | ** **      | 42,079,200 |   |
|                                                                                                                          | ** ** | ** **            | ** **      |   |   |
| Investment  securities available for sale                                                                                     | ** ** | **37,814,226**        | ** **      | 45,613,876 |   |
| Mortgage-backed  securities available for sale                                                                                | ** ** | **31,920,757**        | ** **      | 35,631,823 |   |
| Investment  securities held to maturity  (fair value - 2008, $23,958,326; 2007, $22,826,715)                                  |       | **24,255,762**        | ** **      | 22,247,271 |   |
| Loans receivable  - net of allowance for loan losses - 2008, $3,169,118; 2007, $2,831,065                                     |       | **278,436,554**       | ** **      | 256,932,165 |   |
| Accrued interest  receivable                                                                                                  | ** ** | **2,028,079**         | ** **      | 1,931,991 |   |
| Premises and  equipment - net                                                                                                 | ** ** | **2,764,353**         | ** **      | 2,910,122 |   |
| Federal Home Loan  Bank (FHLB) stock-at cost                                                                                  | ** ** | **2,438,800**         | ** **      | 2,310,100 |   |
| Bank owned life  insurance                                                                                                    | ** ** | **10,830,059**        | ** **      | 10,463,139 |   |
| Deferred tax  asset                                                                                                           | ** ** | **4,328,167**         | ** **      | 3,588,683 |   |
| Prepaid expenses  and other assets                                                                                            | ** ** | **985,253**           | ** **      | 758,190 |   |
|                                                                                                                          | ** ** | ** **            | ** **      |   |   |
| **Total  Assets**                                                                                                             | ** ** | **$**                 | **424,109,666** | ** ** | $ | 424,466,560 |   |
| ** **                                                                                                                    | ** ** | ** **            | ** **      |   |   |
| **Liabilities  and Stockholders’ Equity**                                                                                |       |                  | ** **      |   |   |
| ** **                                                                                                                    |       |                  | ** **      |   |   |
| **Liabilities**                                                                                                               |       |                  | ** **      |   |   |
| Non-interest  bearing deposits                                                                                                | ** ** | **$**                 | **13,609,911**  | ** ** | $ | 16,839,970 |   |
| Interest bearing  deposits                                                                                                    | ** ** | **318,091,491**       | ** **      | 313,947,684 |   |
| Total deposits                                                                                                                | ** ** | **331,701,402**       | ** **      | 330,787,654 |   |
|                                                                                                                          | ** ** | ** **            | ** **      |   |   |
| Demand notes  issued to the U.S. Treasury                                                                                     | ** ** | **197,810**           | ** **      | 42,149 |   |
| FHLB advances                                                                                                                 | ** ** | **37,000,000**        | ** **      | 37,000,000 |   |
| Accrued expenses  and other liabilities                                                                                       | ** ** | **6,311,416**         | ** **      | 5,178,473 |   |
|                                                                                                                          | ** ** | ** **            | ** **      |   |   |
| Total  liabilities                                                                                                            | ** ** | **375,210,628**       | ** **      | 373,008,276 |   |
|                                                                                                                          | ** ** | ** **            | ** **      |   |   |
| Commitments and  Contingencies (Note 10)                                                                                      |       |                  | ** **      |   |   |
|                                                                                                                          |       |                  | ** **      |   |   |
| **Stockholders’  Equity**                                                                                                |       |                  | ** **      |   |   |
| Common stock,  $.01 par value; shares authorized 15,000,000-shares issued and outstanding -  2008, 6,957,676; 2007, 7,225,000 |       | **72,250**            | ** **      | 72,250 |   |
| Additional  paid-in capital                                                                                                   | ** ** | **24,029,125**        | ** **      | 24,041,025 |   |
| Retained earnings  - partially restricted                                                                                     | ** ** | **28,836,350**        | ** **      | 28,974,883 |   |
| Unearned shares  held by ESOP                                                                                                 | ** ** | **(722,664**          | **)**           | (843,108 | ) |
| Accumulated  other comprehensive loss                                                                                         | ** ** | **(930,044**          | **)**           | (786,766 | ) |
| Treasury stock,  at cost: 2008, 267,324 shares; 2007, -0- shares                                                              | ** ** | **(2,385,979**        | **)**           | — |   |
|                                                                                                                          | ** ** | ** **            | ** **      |   |   |
| Total  stockholders’ equity                                                                                              | ** ** | **48,899,038**        | ** **      | 51,458,284 |   |
|                                                                                                                          | ** ** | ** **            | ** **      |   |   |
| **Total  Liabilities and Stockholders’ Equity**                                                                          | ** ** | **$**                 | **424,109,666** | ** ** | $ | 424,466,560 |   |

 

*See notes to consolidated financial statements.*

 

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

**Consolidated Statements of Income**

 
| ** **                                                     | ** ** | **Years Ended December 31,** | ** **     |
|----------------------------------------------------------------|------------|---------------------------------------------|----------------|
| ** **                                                     | ** ** | **2008**                                    | ** **     | **2007** | ** ** |
| ** **                                                     |       |                                        | ** **     |   |   |
| **Interest  and Fees and Dividend Income**                     |       |                                        | ** **     |   |   |
| Loans                                                          | ** ** | **$**                                       | **17,485,366** | ** ** | $ | 16,965,603 |   |
| Mortgage-backed  securities                                    | ** ** | **1,493,761**                               | ** **     | 1,815,539 |   |
| Investment  securities:                                        |       |                                        | ** **     |   |   |
| Taxable                                                        | ** ** | **1,379,451**                               | ** **     | 1,146,983 |   |
| Tax – exempt                                              | ** ** | **1,091,068**                               | ** **     | 1,058,705 |   |
| Dividends                                                      | ** ** | **381,375**                                 | ** **     | 1,128,077 |   |
| Balances due  from depository institutions                     | ** ** | **711,672**                                 | ** **     | 2,225,217 |   |
| Total interest  and dividend income                            | ** ** | **22,542,693**                              | ** **     | 24,340,124 |   |
|                                                           | ** ** | ** **                                  | ** **     |   |   |
| **Interest  Expense**                                          |       |                                        | ** **     |   |   |
| Deposits                                                       | ** ** | **9,330,875**                               | ** **     | 11,618,158 |   |
| FHLB advances  and other borrowed money                        | ** ** | **2,370,614**                               | ** **     | 2,380,488 |   |
| Total interest  expense                                        | ** ** | **11,701,489**                              | ** **     | 13,998,646 |   |
|                                                           | ** ** | ** **                                  | ** **     |   |   |
| **Net  Interest Income**                                       | ** ** | **10,841,204**                              | ** **     | 10,341,478 |   |
| **Provision  for Loan Losses**                                 | ** ** | **585,000**                                 | ** **     | 120,000 |   |
| **Net  Interest Income After Provision for Loan Losses**       | ** ** | **10,256,204**                              | ** **     | 10,221,478 |   |
| ** **                                                     | ** ** | ** **                                  | ** **     |   |   |
| **Other  Income**                                              |       |                                        | ** **     |   |   |
| Service charges  on deposit accounts                           | ** ** | **352,123**                                 | ** **     | 345,804 |   |
| Management fees                                                | ** ** | **384,000**                                 | ** **     | 420,000 |   |
| Other fee income                                               | ** ** | **169,408**                                 | ** **     | 158,351 |   |
| Gain on sale of  loans                                         | ** ** | **6,524**                                   | ** **     | 30,090 |   |
| Loss on sale of  investment securities, net                    | ** ** | **(157,349**                                | **)**          | **—** | ** ** |
| Gain on sale of  OREO                                          | ** ** | **—**                                  | ** **     | 20,689 |   |
| Impairment  charge on investment securities                    | ** ** | **(882,202**                                | **)**          | (859,538 | ) |
| Increase in cash  surrender value of bank owned life insurance | ** ** | **366,920**                                 | ** **     | 360,427 |   |
| Other                                                          | ** ** | **1,439**                                   | ** **     | 8,091 |   |
| Total other  income                                            | ** ** | **240,863**                                 | ** **     | 483,914 |   |
|                                                           | ** ** | ** **                                  | ** **     |   |   |
| **Other  Expenses**                                            |       |                                        | ** **     |   |   |
| Salaries and  employee benefits                                | ** ** | **5,715,821**                               | ** **     | 5,496,754 |   |
| Occupancy and  equipment                                       | ** ** | **1,967,589**                               | ** **     | 1,910,554 |   |
| Advertising and  marketing                                     | ** ** | **466,181**                                 | ** **     | 320,244 |   |
| Professional  fees                                             | ** ** | **438,407**                                 | ** **     | 434,497 |   |
| Loan and OREO  expense                                         | ** ** | **38,256**                                  | ** **     | 43,783 |   |
| Directors fees                                                 | ** ** | **249,560**                                 | ** **     | 225,000 |   |
| Other noninterest  expense                                     | ** ** | **1,427,219**                               | ** **     | 1,376,861 |   |
| Total other  expenses                                          | ** ** | **10,303,033**                              | ** **     | 9,807,693 |   |
|                                                           | ** ** | ** **                                  | ** **     |   |   |
| **Income  Before Income Tax Benefit**                          | ** ** | **194,034**                                 | ** **     | 897,699 |   |
| ** **                                                     | ** ** | ** **                                  | ** **     |   |   |
| **Income  Tax Benefit**                                        | ** ** | **(410,600**                                | **)**          | (157,243 | ) |
| ** **                                                     | ** ** | ** **                                  | ** **     |   |   |
| **Net  Income**                                                | ** ** | **$**                                       | **604,634**    | ** ** | $ | 1,054,942 |   |
| ** **                                                     | ** ** | ** **                                  | ** **     |   |   |
| **Basic  Earnings per Share**                                  | ** ** | **$**                                       | **0.09**       | ** ** | $ | 0.15 |   |

 

*See notes to consolidated financial statements.*

 

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

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

***Years Ended December 31,2008 and 2007***

 
| ** **                                                                         | ** ** | **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,  2007                                                     |       | $                     | 34,414     |                             | $          | 7,598,062           |       | $                                             | —         |                                         | $          | 28,537,679                                    |       | $                                     | —       |                      | $          | (2,670,189 | ) | $ | 33,499,966 |   |   |   |
|                                                                               |       |                  |       |                             |       |                |       |                                          |           |                                         |       |                                          |       |                                  |         |                      |       |
| Proceeds from  the sale of common stock, net                                       |       | 37,836                |       | 16,446,963                       |       |                |       |                                          |           |                                         |       |                                          |       | 16,484,799                            |         |                      |       |
| Common stock  acquired by ESOP                                                     |       |                  |       |                             |       |                |       |                                          |           | (903,330                                     | )          |                                          |       | (903,330                              | )            |                      |       |
| ESOP shares  committed to be released                                              |       |                  |       | (4,000                           | )          |                |       |                                          |           | 60,222                                       |       |                                          |       | 56,222                                |         |                      |       |
| Net income                                                                         |       |                  |       |                             |       |                |       | 1,054,942                                     |           |                                         |       |                                          |       | 1,054,942                             |         | $                         | 1,054,942  |   |
| Dividends  declared-$0.19 per share                                                |       |                  |       |                             |       |                |       | (617,738                                      | )              |                                         |       |                                          |       | (617,738                              | )            |                      |       |
| Change in  liability for retirement plans, net of tax                              |       |                  |       |                             |       |                |       |                                          |           |                                         |       | 542,999                                       |       | 542,999                               |         | 542,999                   |       |
| Change in net  unrealized gain on securities available for sale-net of tax (1)     |       |                  |       |                             |       |                |       |                                          |           |                                         |       | 1,340,424                                     |       | 1,340,424                             |         | 1,340,424                 |       |
| **Balance,  December 31, 2007**                                               |       | 72,250                |       | 24,041,025                       |       | —              |       | 28,974,883                                    |           | (843,108                                     | )          | (786,766                                      | )          | 51,458,284                            |         | 2,938,365                 |       |
|                                                                               |       |                  |       |                             |       |                |       |                                          |           |                                         |       |                                          |       |                                  |         |                      |       |
| **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** | ** ** |

 

----

| (1) | Disclosure of  reclassification, net of tax for years ended: | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----|--------------------------------------------------------------|------------|------------|------------|------------|------------|

 
| ** **                                         | ** **                                                                                                                                  | **2008**   | ** **  | **2007**     | ** ** |
|----------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|--------------|------------|
|                                               | Net unrealized  (losses) gains arising during the year                                                                                      | ** ** | **$**       | **(174,363** | **)**      | $ | 773,129 |   |
|                                               | Add: reclassification  adjustment for impairment charge included in net income (net of tax benefit  of $299,949 and $292,243, respectively) | ** ** | **582,253** |         | 567,295    |   |
|                                               | Add: reclassification  adjustment for net losses included in net income (net of tax benefit of  $53,499 and $0, respectively)               | ** ** | **103,850** | ** **   | **—** | ** ** |
|                                               |                                                                                                                                        |       |        |         |       |   |
|                                               | Change in net  unrealized gain (losses) on securities available for sale                                                                    | ** ** | **$**       | **511,740**  |       | $ | 1,340,424 |   |
|                                               |                                                                                                                                        |       |        |         |       |
| *See  notes to consolidated financial statements.* |                                                                                                                                        |       |        |         |       |

 

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

**ConsolidatedStatements of Cash Flows**

 
| ** **                                                                     | ** ** | **Years Ended December 31,** | ** **     |
|--------------------------------------------------------------------------------|------------|---------------------------------------------|----------------|
| ** **                                                                     | ** ** | **2008**                                    | ** **     | **2007** | ** ** |
| **Operating  Activities**                                                      |       |                                        | ** **     |   |   |
| Net income                                                                     | ** ** | **$**                                       | **604,634**    | ** ** | $ | 1,054,942 |   |
| Adjustments to  reconcile net income to cash provided by operating activities: |       |                                        | ** **     |   |   |
| Provision for:                                                                 |       |                                        | ** **     |   |   |
| Loan losses                                                                    | ** ** | **585,000**                                 | ** **     | 120,000 |   |
| Depreciation and  amortization                                                 | ** ** | **686,083**                                 | ** **     | 655,045 |   |
| Gain on sale of  loans                                                         | ** ** | **(6,524**                                  | **)**          | (30,090 | ) |
| Impairment  charge on investment securities                                    | ** ** | **882,202**                                 | ** **     | 859,538 |   |
| Loss on sale of  investment securities                                         | ** ** | **157,349**                                 | ** **     | — |   |
| ESOP shares  committed to be released                                          | ** ** | **108,544**                                 | ** **     | 56,222 |   |
| Gain on sale of  OREO                                                          | ** ** | **—**                                  | ** **     | (20,689 | ) |
| Origination of  loans held for sale                                            | ** ** | **(1,328,000**                              | **)**          | (4,760,700 | ) |
| Deferred tax  benefit                                                          | ** ** | **(665,676**                                | **)**          | (679,378 | ) |
| Proceeds from  loans sold in the secondary market                              | ** ** | **1,334,524**                               | ** **     | 4,761,794 |   |
| Changes in  assets and liabilities which provided (used) cash:                 |       |                                        | ** **     |   |   |
| Accrued expenses  and other liabilities                                        | ** ** | **140,491**                                 | ** **     | 163,141 |   |
| Prepaid expenses  and other assets                                             | ** ** | **(227,063**                                | **)**          | 877,559 |   |
| Increase in cash  surrender value of bank owned life insurance                 | ** ** | **(366,920**                                | **)**          | (360,427 | ) |
| Accrued interest  receivable                                                   | ** ** | **(96,088**                                 | **)**          | (391 | ) |
| Net cash  provided by operating activities                                     | ** ** | **1,808,556**                               | ** **     | 2,296,566 |   |
|                                                                           | ** ** | ** **                                  | ** **     |   |   |
| **Investing  Activities**                                                      |       |                                        | ** **     |   |   |
| Purchase of  investment securities-available for sale                          | ** ** | **(29,500,000**                             | **)**          | (27,980,000 | ) |
| Purchase of  investment securities-held to maturity                            | ** ** | **(4,000,000**                              | **)**          | — | ** ** |
| Purchase of  mortgage-backed securities                                        | ** ** | **(4,340,000**                              | **)**          | — |   |
| Loans originated  and acquired                                                 | ** ** | **(73,732,689**                             | **)**          | (72,272,204 | ) |
| Proceeds from  maturities and calls of investment securities                   | ** ** | **20,675,000**                              | ** **     | 19,639,274 |   |
| Proceeds from  the sale of investment securities available for sale            | ** ** | **18,145,482**                              | ** **     | — |   |
| (Purchase)  redemption of FHLB stock                                           | ** ** | **(128,700**                                | **)**          | 238,400 |   |
| Principal  repayments of:                                                      |       |                                        | ** **     |   |   |
| Loans                                                                          | ** ** | **51,643,300**                              | ** **     | 51,002,441 |   |
| Mortgage-backed  securities                                                    | ** ** | **8,257,558**                               | ** **     | 8,959,053 |   |
| Purchase of  premises and equipment                                            | ** ** | **(540,314**                                | **)**          | (421,927 | ) |
| Proceeds from  sale of OREO                                                    | ** ** | **—**                                  | ** **     | 153,316 |   |
| Net cash used in  investing activities                                         | ** ** | **(13,520,363**                             | **)**          | (20,681,647 | ) |
|                                                                           | ** ** | ** **                                  | ** **     |   |   |
| **Financing  Activities**                                                      |       |                                        | ** **     |   |   |
| Dividends paid                                                                 | ** ** | **(743,167**                                | **)**          | (617,738 | ) |
| Increase  (decrease) in deposits                                               | ** ** | **913,748**                                 | ** **     | (3,014,284 | ) |
| Purchase of  treasury stock                                                    | ** ** | **(2,385,979**                              | **)**          | — | ** ** |
| Proceeds from  sale of common stock                                            | ** ** | **—**                                  | ** **     | 16,484,799 |   |
| Stock acquired  by ESOP                                                        | ** ** | **—**                                  | ** **     | (903,330 | ) |
| Increase in  demand notes issued to the U.S. Treasury                          | ** ** | **155,661**                                 | ** **     | 4,116 |   |
| Repayments of  FHLB advances                                                   | ** ** | **—**                                  | ** **     | (171,822 | ) |
| Net cash (used  in) provided by financing activities                           | ** ** | **(2,059,737**                              | **)**          | 11,781,741 |   |
|                                                                           | ** ** | ** **                                  | ** **     |   |   |
| **Decrease  in Cash and Cash Equivalents**                                     | ** ** | **(13,771,544**                             | **)**          | (6,203,340 | ) |
| **Cash  and Cash Equivalents, Beginning of Year**                              | ** ** | **42,079,200**                              | ** **     | 48,282,540 |   |
| **Cash  and Cash Equivalents, End of Year**                                    | ** ** | **$**                                       | **28,307,656** | ** ** | $ | 42,079,200 |   |
| ** **                                                                     |       |                                        | ** **     |   |   |
| **Supplemental  Disclosures of Cash Flow Information-**                        |       |                                        | ** **     |   |   |
| Cash paid during  the period for:                                              |       |                                        | ** **     |   |   |
| Interest                                                                       | ** ** | **$**                                       | **11,752,387** | ** ** | $ | 13,997,501 |   |
| Income taxes                                                                   | ** ** | **$**                                       | **400,000**    | ** ** | $ | 450,000 |   |
|                                                                           | ** ** | ** **                                  | ** **     |   |   |
| **Supplemental  Disclosure of Noncash Investing Activity-**                    |       |                                        | ** **     |   |   |
| Loans receivable  transferred to other real estate owned                       | ** ** | **$**                                       | **—**     | ** ** | $ | 132,627 |   |

 

*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”) (“Reorganization”).  As part of the Reorganization, the Bankorganized a Pennsylvania chartered stock savings bank and transferredsubstantially all of its assets and liabilities, including all of itsdeposit-taking, lending and other banking functions and its corporate name, tothe newly created stock savings bank in exchange for 2,753,625 shares of itscommon stock. Concurrent with the Reorganization, the Bank sold 682,500 sharesof common stock in a public offering at a price of $9.52 per share resulting in$6,500,000 of additional equity capital before offering expenses. The costs ofissuing the common stock were deducted from the sale proceeds.

 

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

 

On June 5, 2006, the Bank announced its decision to form 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 the ReorganizationPlan at a special meeting of shareholders held on December 15, 2006.  The reorganization and stock offering werecompleted on January 30, 2007.  In the offering, Alliance Bancorpsold 1,807,339 shares of common stock at a purchase price of $10.00 per shareand realized $16.5 million in net offering proceeds.  In addition, Alliance Bancorp issued5,417,661 shares of common stock in exchange for former outstanding shares ofthe Bank.  Each share of the Bank’scommon stock was converted into 2.09945 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 loanwill be made quarterly over a term of 8 years at an interest rate of 8.25%.

 

**Nature ofOperations**— The Bank is principally in the business ofattracting deposits through its branch offices and investing those depositstogether with funds from borrowings and operations in single-familyresidential, commercial real estate, commercial business and consumer loans.The Bank is primarily supervised by the Federal Deposit Insurance Corporation (“FDIC”)and the Pennsylvania Department of Banking. The Company and the Holding Company are supervised by the Office ofThrift Supervision.

 

**2.    Summary of Significant Accounting Policies**

 

**Basis ofPresentation and Consolidation** - The consolidated financialstatements of the Company include the accounts of the Bank, Alliance DelawareCorporation, which holds and manages certain investment and mortgage-backedsecurities, and Alliance Financial and Investment Services LLC whichparticipates in commission fees from non-insured alternative investmentproducts, all of which are wholly owned subsidiaries of the Bank. Allsignificant intercompany balances and transactions have been eliminated inconsolidation.

 

**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 

 

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disclosure ofcontingent assets and liabilities as of the date of the financial statementsand the reported amounts of income and expenses during the reporting period.Actual results could differ from those estimates. Material estimates that areparticularly susceptible to significant change in the near term relate to thedetermination of the allowance for loan losses, the potential impairment ofFHLB stock, the valuation of deferred tax assets, liability and expense ofemployee benefit obligations, and evaluation of investment securities for otherthan temporary impairment.

 

**SegmentInformation —**The Bank has one reportable segment, “CommunityBanking.”  All of the Banks activitiesare interrelated, and each activity is dependent and assessed based on how eachof the activities of the Bank supports the others.  For example, lending is dependent upon theability of the Bank to fund itself with deposits and other borrowings andmanage interest rate and credit risk. Accordingly, all significant operating decisions are based upon analysisof the Bank as one segment or unit.

 

The Bank operatesonly in the U.S. domestic market, primarily in Pennsylvania’s Delaware andChester Counties.  For the years ended December 31,2008 and 2007 there was no one customer that accounted for more than 10% of theBank’s revenue.

 

**Cash andCash Equivalents** — For purposes of reporting cash flows, cashand cash equivalents include cash and amounts due from depository institutionsand interest-bearing deposits with depository institutions.  As of December 31, 2008 and 2007, theBank’s minimum reserve balance with the Federal Reserve Bank was $2,325,000,and $2,868,000, respectively.

 

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

 

·                  *Securities Held toMaturity* - Securities held to maturity are stated at cost, adjustedfor unamortized purchase premiums and discounts, based on the positive intentand the ability to hold these securities to maturity considering all reasonablyforeseeable conditions and events.

 

·                  *Securities Available forSale* - Securities available for sale, carried at fair value, arethose securities management might sell in response to changes in marketinterest rates, increases in loan demand, changes in liquidity needs and otherconditions.  Unrealized gains and losses,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.

 

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

 
| ** **                               | ** ** | **December 31, 2008**        | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **Less than 12 Months** | ** ** | **12 Months or Longer** | ** ** | ** ** | ** ** | **Total** | ** ** |
| ** **                               | ** ** | **Fair  Value**                        | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Total  Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| ** **                               | ** ** | **(Dollars 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** | ** ** |

 

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| ** **                           | ** ** | **December 31, 2007**        | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **Less than 12 Months** | ** ** | **12 Months or Longer** | ** ** | ** ** | ** ** | **Total** | ** ** |
| ** **                           | ** ** | **Fair  Value**                        | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Total  Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| ** **                           | ** ** | **(Dollars in Thousands)**   | ** ** |
| Securities  Available for Sale       |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government  obligations         |       | $                                      | —     |   | $ | — |   | $ | 1,998 |   | $ | 1 |   | $ | 1,998 |   | $ | 1 |   |
| Mortgage-backed  securities          |       | 3,440                                  |       | 7 |   | 15,028 |   | 225 |   | 18,468 |   | 232 |   |
|                                 |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Total securities  available for sale |       | $                                      | 3,440      |   | $ | 7 |   | $ | 17,026 |   | $ | 226 |   | $ | 20,466 |   | $ | 233 |   |
|                                 |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Securities Held  to Maturity         |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Municipal  obligations               |       | $                                      | 1,014      |   | $ | 12 |   | $ | 1,389 |   | $ | 31 |   | $ | 2,403 |   | $ | 43 |   |

 

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

 

As of December 31, 2008 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, 2008, there were 2 U.S. government obligations, 17 mortgage-backed securities, and 17 municipal obligations, which were in an unrealized loss position.  The Company has the ability and intent to hold these securities until such time as the value recovers or the securities mature. Management does not believe any individual unrealized loss as of December 31, 2008 represents an other-than-temporary impairment.

 

During 2007, due to a decline in the fair value of the Company’sinvestment in a $20 million mutual funds portfolio, the Company identified theimpairment of these securities as other than temporary and recorded a loss of$860,000 as a charge against operating results. During 2008, the Company recorded an additional $882,000 of impairmentcharges on these securities 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 required investment in the common stock of a correspondentbank, is carried at cost. In December 2008, the FHLB of Pittsburghnotified member banks that it was suspending dividend payments and therepurchase of capital stock.

 

Managementevaluates the FHLB stock for impairment in accordance with Statement ofPosition (SOP) 01-6, Accounting by Certain Entities (Including Entities WithTrade Receivables) That Lend to or Finance the Activities of Others.  Management’s determination of whether theseinvestments are impaired is based on their assessment of the ultimaterecoverability of their cost rather than by recognizing temporary declines invalue.  The determination of whether adecline affects the ultimate recoverability of their cost is influenced bycriteria such as (1) the significance of the decline in net assets of theFHLB as compared to the capital stock amount for the FHLB and the length oftime this situation has persisted, (2) commitments by the FHLB to makepayments required by law or regulation and the level of such payments inrelation to the operating performance of the FHLB, and (3) the impact oflegislative and regulatory changes on institutions and, accordingly, on thecustomer base of the FHLB.

 

Managementbelieves no impairment charge is necessary related to the FHLB stock as of December 31,2008.

 

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

 

**Allowancefor Loan Losses** - The allowance for loan losses is increasedby charges to income and decreased by chargeoffs (net of recoveries).  Allowances are provided for specific loanswhen losses are probable and can be estimated. When this occurs, management considers the remaining principal balance,fair value and estimated net realizable value of the property collateralizingthe loan.  Current and future operatingand/or sales conditions are also considered. These estimates are susceptible to changes that could result in materialadjustments to results of operations. Recovery of the carrying value of such loans is dependent to a greatextent on economic, operating and other conditions that may be beyondmanagement’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 asearned.  Accrual of loan interest isdiscontinued and a reserve established on existing accruals if managementbelieves that after considering collateral value, economic and business conditionsand collection efforts, the borrower’s financial condition is such thatcollection of interest is doubtful.

 

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

 

**OtherReal Estate Owned** - Other real estate acquired through, or inlieu of, foreclosure is initially recorded at fair value at the date ofacquisition, establishing a new cost basis. Revenues and expenses from operations are included in other income andother expense.  Additions to thevaluation 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**The Bank is the beneficiary of insurancepolicies on the lives of officers of the Bank. The Bank has recognized theamount that could be realized under the insurance policies as an asset in theconsolidated statements of financial condition.

 

**Premisesand Equipment** — Land is carried at cost. Premises andequipment are recorded at cost, less accumulated depreciation. Depreciation iscomputed using the straight-line method over the expected useful lives of therelated assets which range from two to 40 years.  Amortization of leasehold improvements iscomputed using the straight-line method over the shorter of the useful lives ofthe improvements or the remaining lease term. The costs of maintenance and repairs are expensed as they are incurred,and renewals and betterment’s are capitalized.

 

**IncomeTaxes** - Deferred income taxes are recognized for the taxconsequences of “temporary differences” by applying enacted statutory tax ratesapplicable to future years to differences between the financial statementcarrying amounts and the tax basis of existing assets and liabilities.  The effect on deferred taxes of a change intax rates is recognized in income in the period that includes the enactment date.

 

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The Bank has alsoentered into 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 theratio which that portion of the consolidated taxable income attributed to eachmember of the group having taxable income bears to the consolidated taxableincome.  The Bank had $3,600 and $-0- dueto the Company at December 31, 2008 and 2007, respectively.

 

**Transfers of Financial Assets**,Transfers of financial assets are accounted for as sales, when control over theassets has been surrendered. Control over transferred assets is deemed to besurrendered 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.

 

**Employee Benefit Plans**, The Bank’s401(k) plan allows eligible participants to set aside a certain percentageof 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 $100,000 and $108,000 for 2008, and 2007, respectively.

 

The Bank also maintains a Supplemental Executive and a RetirementIncome Plan (the “Plans”). The accrued amount for the Plans included in otherliabilities was $3.4 million and $3.0 million at December 31, 2008 and2007, respectively. The expense associated with the Plans for the years ended December 21,2008, and 2007 was $521,000, and $535,000, respectively.

 

**Advertising Costs**, The Bankfollows the policy of charging the costs of advertising to expense as incurred.

 

**Earnings per Share *-***There are no convertible securities which would affect the net income(numerator) in calculating basic earnings per share.  Basic earnings per share data are based onthe weighted-average number of shares outstanding during each period.  Diluted earnings per share is furtheradjusted for potential common shares that were dilutive and outstanding duringthe period.  At the present time, theBank’s capital structure has no potential dilutive securities.

 

The following table sets forth the composition of the weighted averageshares (denominator) used in the basic earnings per share computation.

 
| ** **                                        | ** ** | **For the Years**      | ** **  |
|---------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                        | ** ** | **Ended December 31,** | ** **  |
| ** **                                        | ** ** | **2008**                         | ** **  | **2007** | ** ** |
|                                              |       |                             | ** **  |   |   |
| Net Income                                        | ** ** | **$**                            | **604,634** | ** ** | $ | 1,054,942 |   |
|                                              |       |                             | ** **  |   |   |
| Weighted average  shares outstanding              | ** ** | **7,045,768**                    | ** **  | 7,225,000 |   |
| Average unearned  ESOP shares                     | ** ** | **(78,289**                      | **)**       | (87,322 | ) |
| Weighted average  shares outstanding – basic | ** ** | **6,967,479**                    | ** **  | 7,137,678 |   |
|                                              |       |                             | ** **  |   |   |
| Basic earnings  per share                         | ** ** | **$**                            | **0.09**    | ** ** | $ | 0.15 |   |

 

**ComprehensiveIncome —** The Bank is required to present, as a component ofcomprehensive income, the amounts from transactions and other events whichcurrently are excluded from the statement of income and are recorded directlyto stockholders’ equity.

 

**RecentAccounting Pronouncements -**FASB statement No. 141 (R) “BusinessCombinations” was issued in December of 2007. This Statement establishesprinciples and requirements for how the acquirer of a business recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, and any noncontrolling interest in the acquiree. TheStatement also provides guidance for recognizing and measuring the goodwillacquired in the business combination and determines what information todisclose to enable users of the financial statements to evaluate the nature andfinancial effects of the business combination. The guidance will become effectiveas of the beginning of a company’s fiscal year beginning after December 15,2008. This new pronouncement will impact the Company’s accounting for anybusiness combinations after December 31, 2008.

 

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In February 2007,the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities-Includingan amendment of FASB Statement No. 115”. SFAS No. 159 permitsentities to choose to measure many financial instruments and certain otheritems at fair value. Unrealized gains and losses on items for which the fairvalue option has been elected will be recognized in earnings at each subsequentreporting date. SFAS No. 159 is effective for the Company on January 1,2009. The implementation of this standard is not expected to have an impact onthe Company’s consolidated financial position or results of operations.

 

InDecember 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosuresabout Postretirement Benefit Plan Assets”.  This FSP amends SFAS132(R), “Employers’ Disclosures about Pensions and Other PostretirementBenefits”, to provide guidance on an employer’s disclosures about plan assetsof a defined benefit pension or other postretirement plan.  Thedisclosures about plan assets required by this FSP shall be provided for fiscalyears ending after December 15, 2009.  The Company is currentlyreviewing the effect this new pronouncement will have on its consolidatedfinancial 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, 2008** | ** **     |
|-------------------------------------------|------------|---------------------------------|----------------|
| ** **                                | ** ** | **Amortized**                   | ** **     | **Gross Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                | ** ** | **Cost**                        | ** **     | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Available for  Sale                       |       |                            |           |   |   |   |   |   |   |
|                                      |       |                            |           |   |   |   |   |   |   |
| Obligations of  U.S. Government agencies: |       |                            |           |   |   |   |   |   |   |
| Due 1 year or  less                       | ** ** | **$**                           | **998,087**    | ** ** | **$** | **33,793** | ** ** | **—** | ** ** | **$** | **1,031,880** | ** ** |
| Due after 1 year  through 5 years         | ** ** | **1,000,000**                   | ** **     | **22,190** | ** ** | **—** | ** ** | **1,022,190** | ** ** |
| Due after 5  years through 10 years       | ** ** | **17,988,290**                  | ** **     | **238,871** | ** ** | **$** | **(10,940** | **)** | **18,216,221** | ** ** |
| Due after 10  years                       | ** ** | **17,461,414**                  | ** **     | **84,341** | ** ** | **(1,820** | **)** | **17,543,935** | ** ** |
|                                      |       |                            |           |   |   |   |   |   |   |
| Total                                     | ** ** | **$**                           | **37,447,791** | ** ** | **$** | **379,195** | ** ** | **$** | **(12,760** | **)** | **$** | **37,814,226** | ** ** |

 
| ** **                          | ** ** | **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** | ** ** |

 

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

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

 

Included inobligations of U.S. Government agencies at December 31, 2008 and December 31,2007, were $17.0 and $16.4 million, respectively, of structured notes.   These structured notes were comprised ofstep-up bonds that provide the U.S. Government agency with the right, but notthe obligation, to call the bonds on certain dates.

 

For the yearsended December 31, 2008 and 2007, proceeds from sales of investmentsecurities available for sale amounted to $18.1 million and $-0-, respectively.For such periods, gross realized gains on sales amounted to $0 and $-0-,respectively, while gross realized losses amounted to $157,349 and $-0-,respectively. The tax expense (benefit) applicable to the net realized gain(loss) amounted to $(53,499) and $-0-, for 2008 and 2007, respectively.Investment securities with an aggregate carrying value of $4.0 million and $8.0million were pledged as collateral for certain deposits at December 31,2008 and 2007, respectively.

 

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

 

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

 
| ** **                       | ** ** | **December 31, 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** | ** ** |

 

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

 

At December 31,2008 and 2007, the Bank had $5.6 million and $2.5 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 2008 or 2007.

 

**5.    Loans Receivable - Net**

 

Loans receivableconsist of the following:

 
| ** **                 | ** ** | **December 31,** | ** **      |
|----------------------------|------------|-----------------------|-----------------|
| ** **                 | ** ** | **2008**              | ** **      | **2007** | ** ** |
|                       |       |                  |            |   |   |
| Real estate  loans:        |       |                  |            |   |   |
| Single-family              | ** ** | **$**                 | **116,682,502** |   | $ | 111,498,538 |   |
| Multi-family               | ** ** | **1,281,274**         |            | 1,672,707 |   |
| Commercial                 | ** ** | **123,465,061**       |            | 122,702,922 |   |
| Land and  construction     | ** ** | **25,260,812**        |            | 14,591,548 |   |
| Commercial  business       | ** ** | **8,985,325**         |            | 6,924,380 |   |
| Consumer and  other loans  | ** ** | **5,936,821**         |            | 2,367,387 |   |
| Total loans  receivable    | ** ** | **281,611,795**       |            | 259,757,482 |   |
| Less:                      |       |                  |            |   |   |
| Deferred (fees)  costs     | ** ** | **(6,123**            | **)**           | 5,748 |   |
| Allowance for  loan losses | ** ** | **(3,169,118**        | **)**           | (2,831,065 | ) |
| Loans receivable  - net    | ** ** | **$**                 | **278,436,554** | ** ** | $ | 256,932,165 |   |

 

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 $6,524 and $30,090, for the years ended December 31, 2008 and2007, respectively.  Servicing wasreleased upon sale.

 

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

 
| ** **                       | ** ** | **Year Ended**   | ** **    |
|----------------------------------|------------|-----------------------|---------------|
| ** **                       | ** ** | **December 31,** | ** **    |
| ** **                       | ** ** | **2008**              | ** **    | **2007** | ** ** |
|                             |       |                  | ** **    |   |   |
| Balance,  beginning of year      | ** ** | **$**                 | **2,831,065** | ** ** | $ | 2,719,418 |   |
| Provision  charged to operations | ** ** | **585,000**           | ** **    | 120,000 |   |
| Charge-offs                      | ** ** | **(365,823**          | **)**         | (13,668 | ) |
| Recoveries                       | ** ** | **118,876**           | ** **    | 5,315 |   |
|                             |       |                  | ** **    |   |   |
| Balance, end of  year            | ** ** | **$**                 | **3,169,118** | ** ** | $ | 2,831,065 |   |

 

Non-performingloans amounted to $7.0 million and $2.1 million at December 31, 2008 and2007, respectively.  Interest income thatwould have been recorded during 2008 and 2007, if the Bank’s nonperformingloans at the end

 

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of the year hadbeen performing in accordance with their terms was $226,000 and $67,000,respectively.  The amount of interestincome that was actually recorded during 2008 and 2007 with respect to suchnonperforming loans amounted to approximately $121,000 and $47,000,respectively.  Loans 90 days past due andstill accruing were $1.8 million and $595,000 at December 31, 2008 and December 31,2007, respectively.  Non-accrual loanswere $5.2 million and $1.5 million at December 31, 2008 and December 31,2007, respectively.

 

At December 31,2008 and 2007, 100% of impaired loan balances were measured for impairmentbased on the fair value of the loans’ collateral.

 
| ** **                                     | ** ** | **December 31,** | ** **    |
|------------------------------------------------|------------|-----------------------|---------------|
| ** **                                     | ** ** | **2008**              | ** **    | **2007** | ** ** |
|                                           |       |                  |          |   |   |
| Impaired loans  without a valuation allowance  | ** ** | **$**                 | **1,603,076** | ** ** | **$** | **—** | ** ** |
|                                           |       |                  |          |   |   |
| Impaired loans  with a valuation allowance     | ** ** | **$**                 | **2,844,244** |   | $ | 415,989 |   |
|                                           |       |                  |          |   |   |
| Total impaired  loans                          | ** ** | **$**                 | **4,447,320** |   | $ | 415,989 |   |
|                                           |       |                  |          |   |   |
| Valuation  allowance related to impaired loans | ** ** | **$**                 | **255,435**   |   | $ | 41,599 |   |

 
| ** **                                                    | ** ** | **Year Ended**   | ** **    |
|---------------------------------------------------------------|------------|-----------------------|---------------|
| ** **                                                    | ** ** | **December 31,** | ** **    |
| ** **                                                    | ** ** | **2008**              | ** **    | **2007** | ** ** |
|                                                          |       |                  |          |   |   |
| Average impaired  loans                                       | ** ** | **$**                 | **1,234,174** |   | $ | 34,666 |   |
| Interest income  recognized on impaired loans                 | ** ** | **35,437**            |          | 28,289 |   |
| Interest income  recognized on a cash basis on impaired loans |       | **35,437**            |          | 28,289 |   |
|                                                               |            |                       |               |  |  |  |  |

 

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 $5.5 million and $871,000 of these loans at December 31, 2008 and December 31, 2007,respectively.  During 2008, there were $4.7 million in new loans and linesof credit issued and $76,000 in principal repayments to directors and executiveofficers.  At December 31, 2008there were $2.1 million in unused lines of credit.

 

**6.    Premises and Equipment**

 

Premises andequipment are summarized by major classifications as follows:

 
| ** **                | ** ** | **December 31,** | ** **    |
|---------------------------|------------|-----------------------|---------------|
| ** **                | ** ** | **2008**              | ** **    | **2007** | ** ** |
|                      |       |                  | ** **    |   |   |
| Land and  buildings       | ** ** | **$**                 | **4,187,686** | ** ** | $ | 3,887,863 |   |
| Furniture and  fixtures   | ** ** | **5,476,947**         | ** **    | 5,278,330 |   |
|                      |       |                  | ** **    |   |   |
| Total                     | ** ** | **9,664,633**         | ** **    | 9,166,193 |   |
| Accumulated  depreciation | ** ** | **(6,900,280**        | **)**         | (6,256,071 | ) |
|                      |       |                  | ** **    |   |   |
| Net                       | ** ** | **$**                 | **2,764,353** | ** ** | $ | 2,910,122 |   |

 

Depreciationexpense for the years ended December 31, 2008 and 2007 amounted toapproximately $686,000 and $655,000, respectively.

 

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**7.    Deposits**

 

Deposits consistof the following major classifications:

 
| ** **                               | ** ** | **December 31,** | ** **      |
|------------------------------------------|------------|-----------------------|-----------------|
| ** **                               | ** ** | **2008**              | ** **      | **2007** | ** ** |
| ** **                               | ** ** | **Amount**            | ** **      | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
|                                     |       |                  |            |   |   |   |   |   |   |
| Money market  deposit accounts           | ** ** | **$**                 | **22,501,110**  | ** ** | **6.8** | **%** | $ | 25,104,809 |   | 7.6 | % |
| Passbook and  statement savings accounts | ** ** | **39,378,369**        | ** **      | **11.9** | ** ** | 38,212,311 |   | 11.6 |   |
| Certificates of  less than $100,000      | ** ** | **167,750,651**       | ** **      | **50.6** | ** ** | 165,511,070 |   | 49.9 |   |
| Certificates of  $100,000 or more        | ** ** | **40,192,189**        | ** **      | **12.1** | ** ** | 36,348,621 |   | 11.0 |   |
| NOW accounts                             | ** ** | **48,269,172**        | ** **      | **14.5** | ** ** | 48,770,873 |   | 12.8 |   |
| Non-interest  bearing accounts           | ** ** | **13,609,911**        | ** **      | **4.1** | ** ** | 16,839,970 |   | 7.1 |   |
|                                     |       |                  |            |   | ** ** |   |   |   |   |
| Total                                    | ** ** | **$**                 | **331,701,402** | ** ** | **100.0** | **%** | $ | 330,787,654 |   | 100.0 | % |

 

The weightedaverage cost of interest bearing deposits was 2.97% and 3.45% at December 31,2008, and 2007, respectively.  Includedin non-interest bearing deposits are the deposits of Alliance Mutual HoldingCompany, a related party, of $2,945,000 and $ 5,712,000 at December 31,2008 and 2007, respectively.

 

A summary ofcertificates by scheduled maturity was as follows:

 
| ** **                           | ** ** | **December 31, 2008** | ** **  |
|--------------------------------------|------------|---------------------------------|-------------|
| **(Dollars in thousands)** | ** ** | **Amount**                      | ** **  | **Percent** | ** ** |
|                                 |       |                            |        |   |   |
| 2009                                 |       | $                               | 155,631,376 |   | 74.8 | % |
| 2010                                 |       | 38,113,701                      |        | 18.3 | % |
| 2011                                 |       | 11,635,272                      |        | 5.6 | % |
| 2012                                 |       | 1,634,030                       |        | 0.8 | % |
| 2013                                 |       | 593,904                         |        | 0.3 | % |
| Thereafter                           |       | 334,557                         |        | 0.2 | % |
| Total                                |       | $                               | 207,942,840 |   | 100.0 | % |

 

A summary ofinterest expense on deposits was as follows:

 
| ** **                          | ** ** | **Year Ended December 31,** | ** **    |
|-------------------------------------|------------|--------------------------------------------|---------------|
| ** **                          | ** ** | **2008**                                   | ** **    | **2007** | ** ** |
|                                |       |                                       |          |   |   |
| Money market  deposit accounts      | ** ** | **$**                                      | **365,767**   |   | $ | 652,442 |   |
| Other savings  deposits             | ** ** | **215,242**                                |          | 305,373 |   |
| Certificates of  less than $100,000 | ** ** | **6,852,213**                              |          | 8,018,650 |   |
| Certificates of  $100,000 or more   | ** ** | **1,159,037**                              |          | 1,414,943 |   |
| NOW accounts                        | ** ** | **738,616**                                |          | 1,226,750 |   |
| Total                               | ** ** | **$**                                      | **9,330,875** |   | $ | 11,618,158 |   |

 

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**8.     FHLB Advances**

 

FHLB Advances weresummarized as follows:

 
| ** **                | ** ** | ** ** | ** ** | **Interest** | ** ** | **December 31,** | ** **     |
|---------------------------|------------|------------|------------|--------------|------------|-----------------------|----------------|
| ** **                | ** ** | **Due**    | ** ** | **Rate**     | ** ** | **2008**              | ** **     | **2007** | ** ** |
|                      |       |       |       |         |       |                  |           |   |   |
| FHLB convertible  advance |       | 07/22/09   |       | 6.19         | ** ** | **$**                 | **5,000,000**  |   | $ | 5,000,000 |   |
| FHLB convertible  advance |       | 02/03/10   |       | 6.05         | ** ** | **6,000,000**         |           | 6,000,000 |   |
| FHLB convertible  advance |       | 05/17/10   |       | 6.44         | ** ** | **11,000,000**        |           | 11,000,000 |   |
| FHLB convertible  advance |       | 06/28/10   |       | 6.44         | ** ** | **10,000,000**        |           | 10,000,000 |   |
| FHLB convertible  advance |       | 09/22/10   |       | 6.10         | ** ** | **5,000,000**         |           | 5,000,000 |   |
| Total                     | ** ** | ** ** |       |         |       | **$**                 | **37,000,000** |   | $ | 37,000,000 |   |

 

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 31,2008 and 2007, respectively.  In additionto the $20,000,000 credit line with the FHLB, the Company has the ability toborrow an additional $127.4 million and $127.5 million at both December 31,2008 and December 31, 2007. The weighted average rate on FHLB advances was6.30% and 6.30% at December 31, 2008 and 2007, 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.

 

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)**                                         | ** ** |
| ** **                                                   | ** ** | **2008**                                                                     | ** ** | **2007** | ** ** |
|                                                         |       |                                                                         | ** ** |   |   |
| FHLB of  Pittsburgh advances:                                |       |                                                                         | ** ** |   |   |
| Average balance  outstanding                                 | ** ** | **$**                                                                        | **37,000** | ** ** | $ | 37,153 |   |
| Maximum amount  outstanding at any month-end during the year | ** ** | **37,100**                                                                   | ** ** | 37,170 |   |
| Balance  outstanding at end of year                          | ** ** | **37,000**                                                                   | ** ** | 37,000 |   |
| Weighted average  interest rate during the year              | ** ** | **6.30**                                                                     | **%**      | 6.37 | % |
| Weighted average  interest rate at end of period             | ** ** | **6.30**                                                                     | **%**      | 6.30 | % |
|                                                         | ** ** | ** **                                                                   | ** ** |   |   |
| Total  borrowings:                                           |       |                                                                         | ** ** |   |   |
| Average balance  outstanding                                 | ** ** | **$**                                                                        | **37,815** | ** ** | $ | 37,356 |   |
| Maximum amount  outstanding at any month-end during the year | ** ** | **39,812**                                                                   | ** ** | 38,975 |   |
| Balance  outstanding at end of year                          | ** ** | **37,198**                                                                   | ** ** | 37,042 |   |
| Weighted average  interest rate during the year              | ** ** | **6.27**                                                                     | **%**      | 6.37 | % |
| Weighted average  interest rate at end of year               | ** ** | **6.30**                                                                     | **%**      | 6.34 | % |

 

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**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, 2008 and 2007 included approximately $7.1 million,representing bad debt deductions, for which no deferred income taxes have beenprovided.

 

On January 1, 2007, the Company adopted FIN 48, “Accounting forUncertainty in Income Taxes - an interpretation of SFAS No. 109” (“FIN 48”).FIN 48 clarifies the accounting for uncertainty in income taxes recognized inan enterprise’s financial statements in accordance with SFAS No. 109, “Accountingfor Income Taxes”. The implementation of this standard did not have any effecton the Company’s financial position or results of operations.

 

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

 

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

 
| ** **                                            | ** ** | **December 31,** | ** **    |
|-------------------------------------------------------|------------|-----------------------|---------------|
| ** **                                            | ** ** | **2008**              | ** **    | **2007** | ** ** |
|                                                  |       |                  | ** **    |   |   |
| Deferred tax  assets:                                 |       |                  | ** **    |   |   |
| Depreciation and  amortization                        | ** ** | **$**                 | **52,020**    | ** ** | $ | 22,440 |   |
| Allowance for  loan losses                            | ** ** | **1,077,460**         | ** **    | 962,540 |   |
| Additional  minimum liability for retirement plans    | ** ** | **801,309**           | ** **    | 463,875 |   |
|                                                  | ** ** | ** **            | ** **    |   |   |
| Securities  impairment                                | ** ** | **317,900**           | ** **    | 292,243 |   |
| Supplemental  retirement benefits                     | ** ** | **1,157,360**         | ** **    | 1,033,940 |   |
| Capital loss  carryforward                            | ** ** | **327,760**           | ** **    | — |   |
| Alternative  minimum tax                              | ** ** | **1,216,000**         | ** **    | 1,101,000 |   |
| State tax loss  carryfowards                          | ** ** | **316,225**           | ** **    | 252,885 |   |
| Other                                                 | ** ** | **106,854**           | ** **    | 121,415 |   |
| Total deferred  tax assets                            | ** ** | **5,372,888**         | ** **    | 4,250,338 |   |
|                                                  |       |                  | ** **    |   |   |
| Valuation  allowance                                  | ** ** | **(316,225**          | **)**         | (252,885 | ) |
|                                                  |       |                  | ** **    |   |   |
| Deferred tax  liabilities:                            |       |                  | ** **    |   |   |
| Deferred loan  fees                                   | ** ** | **(103,020**          | **)**         | (104,720 | ) |
| Pension Plan                                          | ** ** | **(303,280**          | **)**         | (245,480 | ) |
| Net unrealized  gain on securities available for sale | ** ** | **(322,196**          | **)**         | (58,570 | ) |
| Total deferred  tax liabilities                       | ** ** | **(728,496**          | **)**         | (408,770 | ) |
|                                                  |       |                  | ** **    |   |   |
| Net deferred tax  asset                               | ** ** | **$**                 | **4,328,167** | ** ** | $ | 3,588,683 |   |

 

As of December 31,2008, the Bank had approximately $2.7 million of State NOL carryforwardsexpiring through 2011.  The Company hasrecorded a full valuation allowance for these carryforwards as projected Stateincome at the Bank is not anticipated to be sufficient to realize thesebenefits.

 

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

 
| ** ** | ** ** | **2008**     | ** **   | **2007**   | ** ** |
|------------|------------|--------------|--------------|------------|------------|
|       |       |         |         |       |       |
| Current    | ** ** | **$**        | **255,076**  | ** ** | $          | 522,135 |   |
| Deferred   | ** ** | **(665,676** | **)**        | (679,378   | )          |
|       |       |         | ** **   |       |       |
| Total      | ** ** | **$**        | **(410,600** | **)**      | $          | (157,243 | ) |

 

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

 
| ** **                                                | ** ** | **Year Ended December 31,** | ** **   |
|-----------------------------------------------------------|------------|--------------------------------------------|--------------|
| ** **                                                | ** ** | **2008**                                   | ** **   | **2007** | ** ** |
| ** **                                                | ** ** | ** **                                 | ** **   | **Percentage** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                                | ** ** | ** **                                 | ** **   | **of Pretax** | ** ** | ** ** | ** ** | **of Pretax** | ** ** |
| ** **                                                | ** ** | **Amount**                                 | ** **   | **Income** | ** ** | **Amount** | ** ** | **Income** | ** ** |
|                                                      |       |                                       |         |   | ** ** |   |   |   |   |
| Expense at  statutory rate                                | ** ** | **$**                                      | **65,972**   | ** ** | **34.0** | **%** | $ | 305,218 |   | 34.0 | % |
| Adjustments  resulting from:                              |       |                                       |         |   | ** ** |   |   |   |   |
| Tax-exempt  income                                        | ** ** | **(355,300**                               | **)**        | **(183.1** | **)** | (347,400 | ) | (38.7 | ) |
| Increase in cash  surrender value of life insurance       |       | **(124,753**                               | **)**        | **(64.3** | **)** | (122,545 | ) | (13.7 | ) |
| Other                                                     | ** ** | **3,481**                                  | ** **   | **1.8** | ** ** | 7,484 |   | 0.9 |   |
| Income tax  benefit per consolidated statements of income |       | **$**                                      | **(410,600** | **)** | **(211.6** | **)%** | $ | (157,243 | ) | (17.5 | )% |

 

**10.    Commitments and Contingencies**

 

The Bank hadapproximately $6.4 million and $15.0 million in outstanding loan commitments,excluding unused lines of credit and the undisbursed portion of loans inprocess, at December 31, 2008 and 2007, respectively, which were expectedto fund within the next three months.  Inaddition, the Bank had $1.3 million and $569,000 in standby letters of creditat December 31, 2008 and 2007, respectively, which were secured by cash,marketable securities and real estate. All commitments are issued using the Bank’s current loan policies andunderwriting guidelines and the breakdown between fixed-rate andadjustable-rate loans is as follows:

 
| ** **                                | ** ** | **December 31,** | ** **    |
|-------------------------------------------|------------|-----------------------|---------------|
| ** **                                | ** ** | **2008**              | ** **    | **2007** | ** ** |
|                                      |       |                  |          |   |   |
| Fixed-rate  (ranging from 6.00% to 7.00%) | ** ** | **$**                 | **3,179,750** |   | $ | 803,275 |   |
| Adjustable-rate                           | ** ** | **3,239,675**         |          | 14,203,545 |   |
|                                      |       |                  |          |   |   |
| Total                                     | ** ** | **$**                 | **6,419,425** |   | $ | 15,006,820 |   |

 

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, 2008.

 

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

 

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Expenses relatedto premises and equipment for 2008 and 2007 were $2.0 million and $1.9 million,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, 2008:

 
| ** **                     | ** ** | **Year Ending December 31,** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|
|                           |       |                                        |       |
| 2009                           |       | $                                           | 441,359    |   |
| 2010                           |       | 382,717                                     |       |
| 2011                           |       | 269,814                                     |       |
| 2012                           |       | 196,970                                     |       |
| 2013                           |       | 163,750                                     |       |
| Thereafter                     |       | 975,750                                     |       |
| Total minimum  rental payments |       | $                                           | 2,430,360  |   |

 

**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$229,506 and $276,504, in 2008 and 2007, respectively.  The contribution for the profit-sharing planwas $100,000 and $108,000, in 2008 and 2007, respectively.  There were no employer contributions to the401(k) plan in 2008 and 2007.

 

The net pension costs forthe years ended December 31, 2008 and 2007 included the followingcomponents:

 
| ** **                                                                                                 | ** ** | **2008**     | ** **    | **2007**   | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------|---------------|------------|------------|
| **Net  Periodic Benefit Cost**                                                                             |       |         | ** **    |       |       |
| Service Cost                                                                                               | ** ** | **$**        | **295,877**   | ** ** | $          | 308,684 |   |
| Interest Cost                                                                                              | ** ** | **245,762**  | ** **    | 234,907    |       |
| Expected Return  on Plan Assets                                                                            | ** ** | **(330,789** | **)**         | (302,401   | )          |
| Amortization of  Transition Obligation/(Asset)                                                             | ** ** | **—**   | ** **    | 1,754      |       |
| Amortization of  Prior Service Cost                                                                        | ** ** | **12,685**   | ** **    | 12,685     |       |
| Amortization of  (Gain)/Loss                                                                               | ** ** | **5,971**    | ** **    | 20,875     |       |
| Net Periodic  Benefit Cost                                                                                 | ** ** | **$**        | **229,506**   | ** ** | $          | 276,504 |   |
|                                                                                                       | ** ** | ** **   | ** **    |       |       |
| **Other  changes in plan assets and benefit obligations recognized in other  comprehensive income (loss)** |       |         | ** **    |       |       |
| Net loss/(gain)                                                                                            | ** ** | **$**        | **1,264,076** | ** ** | $          | (404,726 | ) |
| Amortization of  net loss                                                                                  | ** ** | **(5,971**   | **)**         | (20,875    | )          |
| Amortization of  prior service cost                                                                        | ** ** | **(12,685**  | **)**         | (12,685    | )          |
| Amortization of  transition obligation                                                                     | ** ** | **—**   | ** **    | (1,754     | )          |
| Total recognized  in other comprehensive income (loss)                                                     | ** ** | **$**        | **1,245,420** | ** ** | $          | (440,040 | ) |
|                                                                                                       |       |         | ** **    |       |       |
| Total recognized  in net periodic benefit cost and other comprehensive income (loss)                       |       | **$**        | **1,474,926** | ** ** | $          | (163,536 | ) |

 

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 $96,631,and $12,685, respectively.

 

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| **Key  Assumptions**                         |       |     | ** ** |   |   |
|----------------------------------------------|------------|----------|------------|--------|--------|
| Discount Rate  for Net Periodic Benefit Cost | ** ** | **6.00** | **%**      | 5.75   | %      |
| Salary Scale for  Net Periodic Benefit Cost  | ** ** | **4.00** | **%**      | 4.00   | %      |
| Expected Return  on Plan Assets              | ** ** | **8.00** | **%**      | 8.00   | %      |
|                                         |       |     | ** ** |   |   |
| Discount Rate  for Plan Obligations          | ** ** | **6.00** | **%**      | 6.00   | %      |
| Salary Scale for  Plan Obligations           | ** ** | **4.00** | **%**      | 4.00   | %      |

 

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

 
| ** **                                                      | ** ** | **2008**      | ** **     | **2007**   | ** ** |
|-----------------------------------------------------------------|------------|---------------|----------------|------------|------------|
| **Change  in Projected Benefit Obligation**                     |       |          | ** **     |       |       |
| Projected  Benefit Obligation at Beginning of Year              | ** ** | **$**         | **4,354,167**  | ** ** | $          | 4,334,794 |   |
| Service Cost                                                    | ** ** | **295,877**   | ** **     | 308,684    |       |
| Interest Cost                                                   | ** ** | **245,762**   | ** **     | 234,907    |       |
| Benefits paid                                                   | ** ** | **(494,381**  | **)**          | (122,382   | )          |
| Actuarial  (Gain)/Loss                                          | ** ** | **38,169**    | ** **     | (401,836   | )          |
| Projected  Benefit Obligation at End of Year                    | ** ** | **4,439,594** | ** **     | 4,354,167  |       |
|                                                            |       |          | ** **     |       |       |
| **Change  in Plan Assets During Year**                          |       |          | ** **     |       |       |
| Fair Value of  Plan Assets at Beginning of Year                 | ** ** | **4,183,373** | ** **     | 3,600,464  |       |
| Actual Return on  Plan Assets                                   | ** ** | **(895,118**  | **)**          | 305,291    |       |
| Employer  Contributions                                         | ** ** | **400,000**   | ** **     | 400,000    |       |
| Benefits Paid                                                   | ** ** | **(494,381**  | **)**          | (122,382   | )          |
| Fair Value of  Plan Assets at End of Year                       | ** ** | **3,193,874** | ** **     | 4,183,373  |       |
|                                                            |       |          | ** **     |       |       |
| Funded Status at  End of Year, included in other liabilities    | ** ** | **$**         | **(1,245,720** | **)**      | $          | (170,794 | ) |
| ** **                                                      |       |          | ** **     |       |       |
| **Benefit  obligations at end of year**                         |       |          | ** **     |       |       |
| Accumulated  Benefit Obligation                                 | ** ** | **$**         | **3,293,549**  | ** ** | $          | 3,281,096 |   |
|                                                            |       |          | ** **     |       |       |
| **Amounts  recognized in accumulated other comprehensive loss** |       |          | ** **     |       |       |
| Net loss                                                        | ** ** | **$**         | **1,745,577**  | ** ** | $          | 487,472 |   |
| Prior service  cost                                             | ** ** | **126,852**   | ** **     | 139,537    |       |
| Total                                                           | ** ** | **$**         | **1,872,429**  | ** ** | $          | 627,009 |   |

 

**Expected Contributions to the Trust**

** **

The Bank plans tocontribute $400,000 to the Pension Plan in 2009.

 

**Expected Benefit Payments From the Trust**

** **
| 2009      |   | $         | 601,364 |   |
|-----------|--------|-----------|---------|--------|
| 2010      |   | 69,824    |    |
| 2011      |   | 70,769    |    |
| 2012      |   | 181,525   |    |
| 2013      |   | 411,294   |    |
| 2014-2018 |   | 3,066,590 |    |

 

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Asset allocation for the pension plan includes equity securitiesranging from 55% to 75%, debt securities ranging from 25% to 45% and cash andcash equivalents ranging from 0% to 10%. The following table shows the asset allocation as of December 31,2008.

 
| ** **                               | ** ** | ** ** | ** ** | **Percentage  of Assets** | ** ** |
|------------------------------------------|------------|------------|------------|--------------------------------|------------|
| Investment Class                         |       |       |       |                           |       |
| Fixed Income  Investments                |       | $          | 1,173,788  |                           | 36.8       | % |
| Equity  Investments                      |       | 1,597,156  |       | 50.0                           | %          |
| Other                                    |       | 422,930    |       | 13.2                           | %          |
|                                     |       |       |       |                           |       |
| Fair Value as of  December 31, 2008 |       | $          | 3,193,874  |                           | 100.0      | % |

 

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

** **
| ** **                                                              | ** ** | **Year Ended**   | ** **    |
|-------------------------------------------------------------------------|------------|-----------------------|---------------|
| ** **                                                              | ** ** | **December 31,** | ** **    |
| ** **                                                              | ** ** | **2008**              | ** **    | **2007** | ** ** |
| **Change  in benefit obligation during year**                           | ** ** | ** **            | ** **    |   |   |
|                                                                    | ** ** | ** **            | ** **    |   |   |
| Benefit  obligation at beginning of year                                | ** ** | **$**                 | **3,778,374** | ** ** | $ | 3,784,500 |   |
| Service cost                                                            | ** ** | **35,116**            | ** **    | 34,413 |   |
| Interest cost                                                           | ** ** | **221,939**           | ** **    | 213,043 |   |
| Benefit payments                                                        | ** ** | **(158,792**          | **)**         | (158,532 | ) |
| Actuarial (gain)  loss                                                  | ** ** | **11,394**            | ** **    | (95,050 | ) |
| Benefit  obligation at end of year                                      | ** ** | **3,888,031**         | ** **    | 3,778,374 |   |
|                                                                    |       |                  | ** **    |   |   |
| **Change  in plan assets during year**                                  |       |                  | ** **    |   |   |
| Fair value of  plan assets at beginning of year                         | ** ** | **—**            | ** **    | — |   |
| Employer  contributions                                                 | ** ** | **158,792**           | ** **    | 158,532 |   |
| Benefit payments                                                        | ** ** | **(158,792**          | **)**         | (158,532 | ) |
| Fair value of  plan assets at end of year                               | ** ** | **—**            | ** **    | — |   |
|                                                                    |       |                  | ** **    |   |   |
| **Funded  status**                                                      |       |                  | ** **    |   |   |
| Funded status  (included in other liabilites)                           | ** ** | **(3,888,031**        | **)**         | (3,778,374 | ) |
| Unrecognized net  loss                                                  | ** ** | **484,360**           | ** **    | 504,416 |   |
| Unrecognized  prior service cost                                        | ** ** | **—**            | ** **    | 232,652 |   |
| Net liability  recognized                                               | ** ** | **(3,403,671**        | **)**         | (3,041,306 | ) |
|                                                                    | ** ** | ** **            | ** **    |   |   |
| **Change  in accumulated other comprehensive income**                   |       |                  | ** **    |   |   |
| Accumulated  other comprehensive income at beginning of year            | ** ** | **737,068**           | ** **    | 1,120,024 |   |
| Amortization of  net loss                                               | ** ** | **(31,710**           | **)**         | (55,254 | ) |
| Actuarial gain  (loss)                                                  | ** ** | **11,654**            | ** **    | (95,050 | ) |
| Amortization of  prior service cost                                     | ** ** | **(232,652**          | **)**         | (232,652 | ) |
| Net change in  other comprehensive income (loss)                        | ** ** | **(252,708**          | **)**         | (382,956 | ) |
| Accumulated  other comprehensive income at end of year                  | ** ** | **$**                 | **484,360**   | ** ** | $ | 737,068 |   |
|                                                                    |       |                  | ** **    |   |   |
| **Expected  cash-flow information for years after current fiscal year** | ** ** | ** **            | ** **    | ** ** | ** ** |
| 2009                                                                    |       |                  | ** **    | $ | 158,792 |   |
| 2010                                                                    |       |                  | ** **    | 167,814 |   |
| 2011                                                                    |       |                  | ** **    | 267,053 |   |
| 2012                                                                    |       |                  | ** **    | 267,053 |   |
| 2013                                                                    |       |                  | ** **    | 287,501 |   |
| 2014-2018                                                               |       |                  | ** **    | 1,858,907 |   |

 

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| ** **                          | ** ** | **2008**    | ** **  | **2007**   | ** ** |
|-------------------------------------|------------|-------------|-------------|------------|------------|
| **Net  periodic benefit cost**      | ** ** | ** **  | ** **  | ** ** | ** ** |
| Service cost                        | ** ** | **$**       | **35,116**  | ** ** | $          | 34,413 |   |
| Interest cost                       | ** ** | **221,939** | ** **  | 213,043    |       |
| Amortization of  prior service cost | ** ** | **232,652** | ** **  | 232,652    |       |
| Amortization of  net loss           | ** ** | **31,710**  | ** **  | 55,254     |       |
| Net periodic  benefit cost          | ** ** | **$**       | **521,417** | ** ** | $          | 535,362 |   |
| ** **                          | ** ** | ** **  | ** **  | ** ** | ** ** |
| **Key  Assumptions**                | ** ** | ** **  | ** **  | ** ** | ** ** |
| Discount rate  during the year      | ** ** | **6.00**    | **%**       | 5.75       | %          |
| 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 benefitof employees who meet the eligibility requirements as defined in the plan. TheESOP trust purchased 90,333 shares of common stock using proceeds of a loanfrom the Company. The Bank will make cash contributions to the ESOP on anannual basis sufficient to enable the ESOP to make the required loan paymentsto the Company. The loan bears an interest rate of 8.25% with principal and interestpayable quarterly in equal installments over eight years. The loan is securedby the shares of the stock purchased.

 

As the debt is repaid, shares are released from the collateral andallocated to qualified employees. Accordingly, the shares pledged as collateralare reported as unearned ESOP shares in the Consolidated Statements ofFinancial Condition. As shares are released from collateral, the Bank reportscompensation expense equal to the current market price of the shares, and theshares become outstanding for earnings per share computations. The compensationexpense is recorded on a monthly basis. The Company’s expense for the ESOP was$108,544 and $56,222 for the years ended December 31, 2008 and 2007,respectively.

 

The following table presents the components of the ESOP shares:

 
| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Shares released  for allocation | ** ** | **18,066**            |       | 6,022 |   |
| Unreleased  shares              | ** ** | **72,267**            |       | 84,311 |   |
| Total ESOP  shares              | ** ** | **90,333**            |       | 90,033 |   |

 

**12.          RegulatoryCapital Requirements**

 

The Bank issubject to various regulatory capital requirements administered by the federalbanking agencies.  Failure to meetminimum capital requirements can initiate certain mandatory and possiblyadditional discretionary actions by regulators that, if undertaken, could havea direct material effect on the Bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the Bank’s assets,liabilities and certain off-balance-sheet items as calculated under regulatoryaccounting practices.  The Bank’s capitalamounts and classification are also subject to qualitative judgments by theregulators about components, risk weightings and other factors.  Qualitative measures established byregulation to ensure capital adequacy require the Bank to maintain minimumamounts and ratios (set forth in the following table) of Total and Tier 1capital (as defined in the regulations) to risk weighted assets (as defined),and of Tier 1 capital (as defined) to average assets (as defined).  Management believes, as of December 31,2008, that the Bank meets all capital adequacy requirements to which it issubject.

 

As of December 31,2008, the most recent notification from the FDIC categorized the Bank as wellcapitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, theBank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1leverage ratios as set forth in the table. There are no conditions or events since that notification thatmanagement believes have changed the Bank’s category.

 

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

 
| ** **                         | ** ** | ** **                           | ** ** | ** **   | ** ** | ** **                         | ** ** | ** **                 | ** ** | **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, 2008:** |       |                                 |       |         |       |                               |       |                       |       |                       |       |   |   |
| Tier 1 Capital                     | ** ** | **$**                                | **45,349** | ** **   | **10.67**  | **%**                              | **$**      | **17,007**                 | ** ** | **4.00**                   | **%**      | **$** | **21,259** | ** ** | **5.00** | **%** |
| (to average  assets)               |       |                                 |       |         |       |                               |       |                       |       |                       |       |   |   |
| Tier 1 Capital                     | ** ** | **45,349**                           | ** ** | **16.33**    | ** ** | **11,107**                         | ** ** | **4.00**                   | ** ** | **16,660**                 | ** ** | **6.00** | ** ** |
| (to  risk-weighted assets)         |       |                                 |       |         |       |                               |       |                       |       |                       |       |   |   |
| Total Capital                      | ** ** | **48,518**                           | ** ** | **17.47**    | ** ** | **22,214**                         | ** ** | **8.00**                   | ** ** | **27,767**                 | ** ** | **10.00** | ** ** |
| (to  risk-weighted assets)         |       |                                 |       |         |       |                               |       |                       |       |                       |       |   |   |
|                               |       |                                 |       |         |       |                               |       |                       |       |                       |       |   |   |
| As of  December 31, 2007:     |       |                                 |       |         |       |                               |       |                       |       |                       |       |   |   |
| Tier 1 Capital                     |       | $                                    | 44,628     |         | 10.52      | %                                  | $          | 16,964                     |       | 4.00                       | %          | $ | 21,205 |   | 5.00 | % |
| (to average  assets)               |       |                                 |       |         |       |                               |       |                       |       |                       |       |   |   |
| Tier 1 Capital                     |       | 44,628                               |       | 16.35        |       | 10,921                             |       | 4.00                       |       | 16,381                     |       | 6.00 |   |
| (to  risk-weighted assets)         |       |                                 |       |         |       |                               |       |                       |       |                       |       |   |   |
| Total Capital                      |       | 47,459                               |       | 17.38        |       | 21,841                             |       | 8.00                       |       | 27,302                     |       | 10.00 |   |
| (to  risk-weighted assets)         |       |                                 |       |         |       |                               |       |                       |       |                       |       |   |   |

 

The Bank’s capitalat December 31, 2008 and 2007 for financial statement purposes differsfrom Tier 1 capital amounts by $625,000 and $115,000, respectively, representingthe exclusion for regulatory purposes of unrealized gains and losses onsecurities available for sale and $1.6 million and $901,000, respectively,representing the exclusion of amounts in accumulated other comprehensive lossfrom the application of SFAS No. 158.

 

**13.Related Party Transactions**

 

The Bank maintainsa lease agreement with the Holding Company for one of its office locations. Theinitial lease term expires in September 2015 and the Bank has paid $42,000each year for the years ended December 31, 2008 and 2007.  In addition, the Bank maintains a managementfee agreement with the Holding Company which provides for the sharing ofcertain company related expenses.  Such expensesinclude salaries and benefits, insurance expenses, professional fees anddirectors fees.  The Bank has receivedmanagement fees amounting to $384,000 and $420,000 for the years ended December 31,2008 and 2007, respectively.

 

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

** **

Managementuses its best judgment in estimating the fair value of the Bank’s 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 Bank could have realized in a sales transactionon the dates indicated.  The estimatedfair value amounts have been measured as of their respective year-ends and havenot been re-evaluated or updated for purposes of these financial statementssubsequent to those respective dates.  Assuch, the estimated fair values of these financial instruments subsequent tothe respective reporting dates may be different than the amounts reported ateach year-end.

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedStatement No. 157, *Fair Value Measurements*(“SFAS 157”), which defines fair value, establishes a framework for measuringfair value under GAAP, and expands disclosures about fair valuemeasurements.  SFAS 157 applies to otheraccounting pronouncements that require or permit fair value measurements.  The Bank adopted SFAS 157 effective for itsfiscal year beginning January 1, 2008.

 

InDecember 2007, the FASB issued FASB Staff Position 157-2, *Effective Date of FASB Statement No. 157*(“FSP 157-2”).  FSP 157-2 delays theeffective date of SFAS 157 for all non-financial assets and liabilities, exceptthose that are recognized or disclosed at fair value on a recurring basis (atleast annually) to fiscal years beginning after

 

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November 15, 2008 and interim periods within those fiscalyears.  As such, the Bank only partiallyadopted the provisions of SFAS 157, and will begin to account and report fornon-financial assets and liabilities in 2009. In October 2008, the FASB issued FASB Staff Position 157-3,*Determining the Fair Value of a Financial Asset Whenthe Market for that Asset is Not Active* (“FSP 157-3”), toclarify the application of the provisions of SFAS 157 in an inactivemarket and how an entity would determine fair value in an inactive market.  FSP 157-3 is effective immediately andapplies to the Bank’s December 31, 2008 consolidated financialstatements.  The adoption ofSFAS 157 and FSP 157-3 had no impact on the amounts reported in thefinancial statements*.*

 

SFAS157 establishes a fair value hierarchy that prioritizes the inputs to valuationmethods used to measure fair value.  Thehierarchy gives the highest priority to unadjusted quoted prices in activemarkets for identical assets or liabilities (Level 1 measurements) and thelowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchyunder SFAS 157 are as follows:

 

*Level1*: Unadjusted quoted prices in active markets that areaccessible at the measurement date for identical, unrestricted assets orliabilities.

 

*Level2*: Quoted prices inmarkets that are not active, or inputs that are observable either directly orindirectly, for substantially the full term of the asset or liability.

 

*Level 3*: Prices or valuation techniques that requireinputs that are both significant to the fair value measurement and unobservable(i.e., supported with little or no market activity).

 

Anasset’s or liability’s level within the fair value hierarchy is based on thelowest level of input that is significant to the fair value measurement.

 

Forfinancial assets measured at fair value on a recurring 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** | ** **     |
|------------------------------------------------|------------|----------------|-----------------|---------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|----------------|-------------------------------------------------------|----------------|
| ** **                                     | ** ** | ** **     | ** **      | ** **                                                                                  | ** ** | ** **                                                 | ** **     | ** **                                            | ** **     |
| Investment  securities available for sale      | ** ** | **$**          | **37,814, 226** | ** **                                                                                  | **$**      | **—**                                                 | ** **     | **$**                                                 | **37,814,226** | ** ** | **$** | **—** | ** ** |
| Mortgage backed  securities available for sale | ** ** | **31,920,757** | ** **      | **—**                                                                                  | ** ** | **$**                                                      | **31,920,757** | ** **                                            | **—**     | ** ** |
| Total                                          | ** ** | **$**          | **69,734,983**  | ** **                                                                                  | **$**      | **—**                                                 | ** **     | **$**                                                 | **69,734,983** | ** ** | **$** | **—** | ** ** |

 

Forfinancial assets 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  | ** ** | **$**      | **2,588,809** | ** **                                                                                  | **$**      | **—**                                                 | ** ** | **$**                                                 | **—** | ** ** | **$** | **2,588,809** | ** ** |
|                 |            |            |               |                                                                                             |            |                                                            |            |                                                       |            |  |  |  |  |

 

Thefollowing information should not be interpreted as an estimate of the fairvalue of the entire Company since a fair value calculation is only provided fora limited portion of the Company’s assets and liabilities.  Due to a wide range of valuation techniquesand the degree of subjectivity used in making the estimates, comparisonsbetween the

 

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Company’sdisclosures and those of other companies may not be meaningful.  The following methods and assumptions wereused to estimate the fair values of the Company’s financial instruments at December 31,2008 and 2007.

 

**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 are adjustedto reflect illiquidity and/or non-transferability, and such adjustments aregenerally 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 that are accounted forunder FASB Statement No. 114,*Accounting by Creditors for Impairment of a Loan*(“SFAS 114”)*,*in which the Bank has measuredimpairment generally based on the fair value of the loan’s collateral.  Fair value is generally determined based uponindependent third-party appraisals of the properties, or discounted cash flowsbased upon the expected proceeds.  Theseassets are included as Level 3 fair values, based upon the lowest level ofinput that is significant to the fair value measurements.  The fair value consists of the loan balancesof $2,844,244, net of a valuation of $255,435.

** **

**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.

** **

**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 (Disclosed at Cost),**Fair values for the Company’s off-balancesheet financial instruments (lending commitments and letters of credit) arebased on fees currently charged in the market to enter into similar agreements,taking into account, the remaining terms of the agreements and thecounterparties’ credit standing.

 

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Theestimated fair values of the Company’s financial instruments were as follows atDecember 31, 2008 and 2007.

 
| ** **                                     | ** ** | **2008**                | ** ** | **2007**            | ** ** |
|------------------------------------------------|------------|-------------------------|------------|---------------------|------------|
| ** **                                     | ** ** | **Carrying**            | ** ** | **Estimated**       | ** ** | **Carrying** | ** ** | **Estimated** | ** ** |
| ** **                                     | ** ** | **Amount**              | ** ** | **Fair Value** | ** ** | **Amount** | ** ** | **Fair Value** | ** ** |
| ** **                                     | ** ** | **(In thousands)** | ** ** |
| Assets:                                        |       |                    |       |                |       |   |   |   |   |
| Cash and due  from banks                       | ** ** | **$**                   | **7,849**  | ** **          | **$**      | **7,849** |   | $ | 3,918 |   | $ | 3,918 |   |
| Interest bearing  deposits at banks            | ** ** | **20,459**              | ** ** | **20,459**          |       | 38,161 |   | 38,161 |   |
| Investment  securities                         | ** ** | **62,070**              | ** ** | **61,773**          |       | 67,861 |   | 68,441 |   |
| Mortgage-backed  securities                    | ** ** | **31,921**              | ** ** | **31,921**          |       | 35,632 |   | 35,632 |   |
| Loans receivable                               | ** ** | **278,437**             | ** ** | **275,903**         |       | 256,932 |   | 255,323 |   |
| FHLB stock                                     | ** ** | **2,439**               | ** ** | **2,439**           |       | 2,310 |   | 2,310 |   |
| Accrued interest  receivable                   | ** ** | **2,028**               | ** ** | **2,028**           |       | 1,932 |   | 1,932 |   |
|                                           |       |                    |       |                |       |   |   |   |   |
| Liabilities:                                   |       |                    |       |                |       |   |   |   |   |
| NOW and MMDA  deposits (1)                     | ** ** | **$**                   | **84,380** | ** **          | **$**      | **84,380** |   | $ | 90,716 |   | $ | 90,716 |   |
| Other savings  deposits                        | ** ** | **39,378**              | ** ** | **39,378**          |       | 38,212 |   | 38,212 |   |
| Certificate  accounts                          | ** ** | **207,943**             | ** ** | **210,852**         |       | 201,860 |   | 202,283 |   |
| FHLB  advances & other borrowed money | ** ** | **37,198**              | ** ** | **39,199**          |       | 37,042 |   | 39,248 |   |
| Accrued interest  payable                      | ** ** | **220**                 | ** ** | **220**             |       | 271 |   | 271 |   |
| Off balance  sheet instruments                 |       | —                  |       | —              | ** ** | — |   | — |   |

 

----

(1) Includesnon-interest bearing accounts

 

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

 

**CONDENSEDBALANCE SHEETS**

 
| ** **                                          | ** ** | **December 31,** | ** **     |
|-----------------------------------------------------|------------|-----------------------|----------------|
| ** **                                          | ** ** | **2008**              | ** **     | **2007** | ** ** |
| **ASSETS:**                                         |       |                  |           |   |   |
| Cash and cash equivalents                           |       | **$**                 | **3,770,669**  |   | $ | 6,773,010 |   |
| Loan receivable – ESOP                         |       | **722,664**           |           | 843,108 |   |
| Other assets                                        |       | **3,600**             |           | — |   |
| Investment in Alliance Bank                         |       | **44,419,105**        |           | 43,842,166 |   |
| Total assets                                        |       | **$**                 | **48,916,038** |   | $ | 51,458,284 |   |
|                                                |       | ** **            |           |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**       |       | ** **            |           |   |   |
| **LIABILITIES:**                                    |       | ** **            |           |   |   |
| Total liabilities                                   |       | **$**                 | **17,000**     |   | — |   |
|                                                |       | ** **            |           |   |   |
| **STOCKHOLDERS’ EQUITY**                       |       | ** **            |           |   |   |
| Total stockholders’ equity                     |       | **48,899,038**        |           | 51,458,284 |   |
|                                                |       | ** **            |           |   |   |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY** |       | **$**                 | **48,916,038** |   | $ | 51,458,284 |   |

 

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**CONDENSED INCOME STATEMENTS**

 
| ** **                                                                                   | ** ** | **For the Year Ended** | ** **  |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------|-------------|
| ** **                                                                                   | ** ** | **December 31, 2008**       | ** **  | **December 31, 2007** | ** ** |
| **INCOME:**                                                                                  |       |                                  | ** **  |   |   |
| Interest  income                                                                             | ** ** | **$**                                 | **68,862**  | ** ** | $ | 67,655 |   |
| Total income                                                                                 | ** ** | **68,862**                            | ** **  | 67,655 |   |
|                                                                                         |       |                                  | ** **  |   |   |
| **EXPENSES:**                                                                                |       |                                  | ** **  |   |   |
| Legal Fees                                                                                   | ** ** | **32,000**                            | ** **  | 32,000 |   |
| Stock  Related Expense                                                                       | ** ** | **36,500**                            | ** **  | 36,600 |   |
| Capital  stock tax                                                                           | ** ** | **11,000**                            | ** **  | — |   |
| Total  expenses                                                                              | ** ** | **79,500**                            | ** **  | 68,600 |   |
|                                                                                         |       |                                  | ** **  |   |   |
| **LOSS BEFORE INCOME TAXES (BENEFIT) AND EQUITY IN UNDISTRUBUTED NET  INCOME OF SUBSIDIARY** | ** ** | **(10,638**                           | **)**       | (945 | ) |
|                                                                                         |       |                                  | ** **  |   |   |
| **EQUITY IN UNDISTRUBUTED NET INCOME OF SUBSIDIARY**                                         | ** ** | **611,672**                           | ** **  | 1,055,887 |   |
|                                                                                         |       |                                  | ** **  |   |   |
| **Income Tax Benefit**                                                                       | ** ** | **(3,600**                            | **)**       | — |   |
|                                                                                         |       |                                  | ** **  |   |   |
| **NET INCOME**                                                                               | ** ** | **$**                                 | **604,634** | ** ** | $ | 1,054,942 |   |

 

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**CONDENSED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                     | ** ** | **For the Year Ended** | ** **    |
|--------------------------------------------------------------------------------|------------|---------------------------------------|---------------|
| ** **                                                                     | ** ** | **December 31, 2008**       | ** **    | **December 31, 2007** | ** ** |
| **OPERATING ACTIVITIES:**                                                      | ** ** | ** **                            | ** **    | ** ** | ** ** |
| ** **                                                                     | ** ** | ** **                            | ** **    | ** ** | ** ** |
| Net Income                                                                     | ** ** | **$**                                 | **604,634**   | ** ** | $ | 1,054,942 |   |
| Adjustments to reconcile net income to cash  provided by (used in) operations: |       |                                  | ** **    |   |   |
| Undistributed net income of subsidiary                                         | ** ** | **(611,672**                          | **)**         | (1,055,887 | ) |
| Increase in other assets                                                       | ** ** | **(3,600**                            | **)**         | — |   |
| Increase in other liabilities                                                  | ** ** | **17,000**                            | ** **    | — |   |
| Net cash provided by (used in) operating  activities                           | ** ** | **6,362**                             | ** **    | (945 | ) |
|                                                                           |       |                                  | ** **    |   |   |
| **INVESTING ACTIVITIES:**                                                      |       |                                  | ** **    |   |   |
|                                                                           |       |                                  | ** **    |   |   |
| Disbursement for ESOP loan                                                     | ** ** | **—**                            | ** **    | (903,330 | ) |
| Principal repayments on ESOP loan                                              | ** ** | **120,444**                           | ** **    | 60,222 |   |
| Net cash provided by (used in) investing  activities                           | ** ** | **120,444**                           | ** **    | (843,108 | ) |
|                                                                           |       |                                  | ** **    |   |   |
| **FINANCING ACTIVITIES:**                                                      |       |                                  | ** **    |   |   |
|                                                                           |       |                                  | ** **    |   |   |
| Net proceeds from equity offering                                              | ** ** | **—**                            | ** **    | 16,484,799 |   |
| Contribution of capital to Alliance Bank                                       | ** ** | **—**                            | ** **    | (8,249,998 | ) |
| Purchase of treasury stock                                                     | ** ** | **(2,385,979**                        | **)**         | — |   |
| Dividends paid                                                                 | ** ** | **(743,168**                          | **)**         | (617,738 | ) |
| Net cash provided by financing activities                                      | ** ** | **(3,129,147**                        | **)**         | 7,617,063 |   |
|                                                                           |       |                                  | ** **    |   |   |
| Net (decrease) increase in cash and cash  equivalents                          | ** ** | **(3,002,341**                        | **)**         | 6,773,010 |   |
| Cash and cash equivalents – beginning of  period                          | ** ** | **6,773,010**                         | ** **    | — |   |
|                                                                           |       |                                  | ** **    |   |   |
| Cash and cash equivalents – end of period                                 | ** ** | **$**                                 | **3,770,669** | ** ** | $ | 6,773,010 |   |

 

Alliance Bancorp, Inc. of Pennsylvaniawas formed on January 30, 2007.  Thecondensed financial information for the year ended December 31, 2007includes the income of the Bank for January 1, 2007 to January 29,2007.

 

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**Item 9. Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure.**

 

Not applicable.

 

**Item 9A (T). Controls and Procedures.**

 

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

 

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

 

The report of management’s assessment of internal controls overfinancial reporting is incorporated by reference to Item 8 of this report.

 

**Item 9B. Other Information.**

 

Not applicable.

 

**PART III.**

 

**Item 10. Directors, Executive Officers and Corporate Governance.**

 

The information required herein is incorporated byreference to the Company’s definitive proxy statement for the annual meeting ofstock holders to be held April 22, 2009. (“Definitive Proxy Statement”).

 

**Item 11. Executive Compensation.**

 

The information required herein is incorporatedby reference to the Definitive Proxy Statement.

 

**Item 12. Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.**

 

The information required herein isincorporated by reference to the Definitive Proxy Statement.

 

**Item 13. Certain Relationships and Related Transactions, and DirectorIndependence.**

 

The information required herein isincorporated by reference to the Definitive Proxy Statement

 

**Item 14. Principal Accounting Fees and Services.**

 

The information required herein isincorporated by reference to the Definitive Proxy Statement

 

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**PART IV.**

 

**Item 15. Exhibits and Financial Statement Schedules.**

 

(1) The following financial statementsare incorporated by reference from Item 8 hereof (see Exhibit 13):

 

Report of Independent Registered PublicAccounting Firm.

Consolidated Statements of FinancialCondition at December 31, 2008 and 2007.

Consolidated Statements of Income for theyears ended December 31, 2008 and 2007.

Consolidated Statements of Changes inStockholders’ Equity for the years ended December 31, 2008 and 2007.

Consolidated Statements of Cash Flows for theyears ended December 31, 2008 and 2007.

Notes to Consolidated Financial Statements.

 

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

 

(3) The following exhibits are filed aspart of this Form 10-K and this list includes the Exhibit Index.

 
| **No** | ** ** | **Description**                                                                                                       |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------|
| 3.1    |       | Federal  Stock Charter of Alliance Bancorp, Inc. of Pennsylvania*                                                |
| 3.2    |       | Amended and  Restated Bylaws of Alliance Bancorp, Inc. of Pennsylvania**                                         |
| 4.0    |       | 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****  |
| 23.1   |       | Consent of  Beard Miller Company LLP                                                                                  |
| 31.1   |       | Section 302  Certification of the Chief Executive Officer                                                        |
| 31.2   |       | Section 302  Certification of the Chief Financial Officer                                                        |
| 32.1   |       | Section 906 Certification of the Chief Executive Officer                                                         |
| 32.2   |       | Section 906  Certification of the Chief Financial Officer                                                        |

 

----

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

 

 
| ** **                 | **ALLIANCE  BANCORP, INC, OF PENNSYLVANIA** |
|----------------------------|---------------------------------------------|
| ** **                 | ** **                                  |
| Dated: March 23, 2009 | By:                                         | /s/ Dennis  D. Cirucci |
|                       | Dennis D.  Cirucci                          |
|                       | President  and Chief Executive Officer      |
|                            |                                             |  |  |

 

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 

 
| /s/Dennis D.  Cirucci                                 |   |                 |
|-------------------------------------------------------|--------|----------------------|
| Dennis D.  Cirucci                                    |   |                 |
| President and  Chief Executive Officer                |   | March 23,  2009 |
| (Principal  Executive Officer)                        |   |                 |
|                                                  |   |                 |
|                                                  |   |                 |
| /s/Peter J.  Meier                                    |   |                 |
| Peter J.  Meier                                       |   |                 |
| Executive  Vice President and Chief Financial Officer |   |                 |
| (Principal  Financial and Accounting Officer)         |   | March 23,  2009 |
|                                                  |   |                 |
|                                                  |   |                 |
| /s/William  E. Hecht                                  |   |                 |
| William E. Hecht                                      |   |                 |
| Chairman of  the Board                                |   | March 23,  2009 |
|                                                  |   |                 |
|                                                  |   |                 |
| /s/J.  William Cotter, Jr.                       |   |                 |
| J. William  Cotter, Jr.                          |   |                 |
| Director                                              |   |                 |
|                                                  |   |                 |
|                                                  |   |                 |
| /s/John A.  Raggi                                     |   | March 23,  2009 |
| John A.  Raggi                                        |   |                 |
| Director                                              |   |                 |

 

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| /s/Philip K.  Stonier  |   | March 23,  2009 |
|------------------------|--------|----------------------|
| Philip K.  Stonier     |   |                 |
| Director               |   |                 |
|                   |   |                 |
|                   |   |                 |
| /s/James S.  Carr      |   | March 23,  2009 |
| James S.  Carr         |   |                 |
| Director               |   |                 |
|                   |   |                 |
|                   |   |                 |
| /s/G.  Bradley Rainer  |   | March 23,  2009 |
| G. Bradley  Rainer     |   |                 |
| Director               |   |                 |
|                   |   |                 |
|                   |   |                 |
| /s/R.  Cheston Woolard |   | March 23,  2009 |
| R. Cheston  Woolard    |   |                 |
| Director               |   |                 |
|                   |   |                 |
|                   |   |                 |
| /s/Timothy  E. Flatley |   | March 23,  2009 |
| Timothy E.  Flatley    |   |                 |
| Director               |   |                 |

 

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**Corporate Information**

 

**Independent Registered Public Accounting Firm**

Beard MillerCompany LLP

1200 AtwaterDrive, Suite 225

Malvern, PA19355

 

**Market Makers**

FTN MidwestSecurities Corp

Sandler O’Neill & Partners, LP

USB FinancialServices, Inc.

Stifel,Nicholas, & Company, Inc.

 

**Securities Counsel**

Elias, Matz,Tiernan & Herrick LLP

734 15thStreet, NW, 11th Floor

Washington,D.C. 20005

 

**InvestorInformation**

Investors, analysts and othersseeking

information may contact:

Kathleen P. Lynch

Corporate Secretary

541 Lawrence Road

Broomall, PA 19008-3599

(610) 353-2900

 

**TransferAgent**

Direct questions regardingdividend checks,

address and name changes orlost certificates to:

Registrar and Transfer Company

10 Commerce Drive

Cranford, NJ 07016

 

**Market Information**

 

AllianceBancorp Common Stock is traded on the Nasdaq Global Market and quoted under thesymbol “ALLB”.  The prices shown belowreflect the prices reported by the Nasdaq Stock Market adjusted for thereorganization on January 30, 2007. The closing price on December 31, 2008 was $7.50 per share.  There were 6,957,676 shares outstanding as ofDecember 31, 2008, comprised of 3,973,750 shares held by Alliance MutualHolding Company and 2,983,926 shares held by approximately 1,100 stockholders.

 
| **For the Quarter Ended** | ** ** | **High** | ** ** | **Low**    | ** ** | **Close** | ** ** | **Cash Dividends Declared** | ** ** |
|------------------------------------------|------------|----------|------------|------------|------------|-----------|------------|---------------------------------------|------------|
|                                     |       |     |       |       |       |      |       |                                  |       |
| **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**                               | ** ** |
|                                     |       |     |       |       |       |      |       |                                  |       |
| December 31, 2007                   |       | $        | 9.15       |       | $          | 7.15      |       | $                                     | 7.31       |   | $ | .05 |   |
|                                     |       |     |       |       |       |      |       |                                  |       |
| September 30, 2007                  |       | 9.44     |       | 8.39       |       | 9.10      |       | .05                                   |       |
|                                     |       |     |       |       |       |      |       |                                  |       |
| June 30, 2007                       |       | 9.59     |       | 9.00       |       | 9.29      |       | .05                                   |       |
|                                     |       |     |       |       |       |      |       |                                  |       |
| March 31, 2007                      |       | 10.50    |       | 9.00       |       | 9.05      |       | .04                                   |       |

 

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**Market for Common Equity, and Related Stockholder Matters and Purchasesof Equity Securities**

 

The following table sets forthinformation with respect to purchases made by or on behalf of the Company ofshares of common stock of the Company during the indicated periods.

** **
| **Period**         | ** ** | **Total Number**

**of Shares**

**Purchased(1)** | ** ** | **Average Price**

**Paid per Share** | ** ** | **Total Number of**

**Shares Purchased**

**as Part of Publicly**

**Announced Plans**

**or Programs** | ** ** | **Maximum**

**Number of Shares**

**that May Yet Be**

**Purchased Under**

**the Plans or**

**Programs(1)** | ** ** |
|--------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **         | ** ** | ** **                                                  | ** ** | ** **                                           | ** ** | ** **                                                                                                                                       | ** ** | ** **                                                                                                                                             | ** ** |
| October 2008  |       | 10,000                                                      |       | $                                                    | 7.78       |                                                                                                                                             | 10,000     |                                                                                                                                                   | 82,801     |   |
| November 2008 |       | 19,000                                                      |       | 8.08                                                 |       | 19,000                                                                                                                                           |       | 63,801                                                                                                                                                 |       |
| December 2008 |       | 6,000                                                       |       | 8.13                                                 |       | 6,000                                                                                                                                            |       | 57,801                                                                                                                                                 |       |
|               |       |                                                        |       |                                                 |       |                                                                                                                                             |       |                                                                                                                                                   |       |
| Totals             |       | 35,000                                                      |       | $                                                    | 8.00       |                                                                                                                                             | 35,000     |                                                                                                                                                   |       |   |

 

----

(1)                                  Allshares were repurchased under the Company’s announced repurchase program. On January 25,2008, the Company announced a program to repurchase up to 325,125 shares, or10% of the outstanding common stock other than shares owned by Alliance MutualHolding Company, commencing on January 30, 2008, the one year anniversaryof the completion of the mid-tier stock holding company reorganization ofAlliance Bank.  The program will expirein twelve months, or on January 30, 2009, and all shares are purchased inthe open market or by privately negotiated transactions, as in the opinion ofmanagement, market conditions warrant.

 

On January 29, 2009, theCompany announced a program to repurchase up to 292,612 shares, or 10% of theoutstanding common stock other than shares owned by Alliance Mutual HoldingCompany, commencing on January 30, 2009. The program will expire in twelve months, or on January 30, 2010,and all shares are purchased in the open market or by privately negotiatedtransactions, as in the opinion of management, market conditions warrant.

 

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