Alliance Bancorp Inc Of Pennsylvania 10-K 2008 FY Annual report

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

Commission File No.:  001-33189

ALLIANCE BANCORP, INC. OF PENNSYLVANIA

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

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

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

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

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

As of June 30, 2008, the aggregate value of the 2,876,023 shares of Common Stock of the Registrant issued and outstanding on such date, which excludes 3,973,750 shares held by the Registrant’s mutual holding company, Alliance Mutual Holding Company, and 375,227 shares held by all directors and officers 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 trade price of $8.99 per share of the Registrant’s Common Stock on June 30, 2008.  Although directors and officers and the ESOP were assumed to be “affiliates” of the Registrant for purposes of this calculation, the classification is not to be interpreted as an admission of such status.

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

DOCUMENTS INCORPORATED BY REFERENCE

(1)Portions of the definitive proxy statement for the Annual Meeting of Stockholders to be held April 22, 2009 are incorporated into Part III.

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

Item 1.  Business

General

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

We operate a total of nine banking offices located in Delaware and Chester Counties, which are suburbs of Philadelphia.  Our primary business consists of attracting deposits from the general public and using those funds, together with funds we borrow, to originate loans to our customers and invest in securities such as U.S. Government and agency securities, mortgage-backed securities and municipal obligations.  At December 31, 2008, we had $424.1 million of total assets, $331.7 million of total deposits and stockholders’ equity of $48.9 million.

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

Market Area and Competition

Alliance Bank is headquartered in Broomall, Pennsylvania and conducts its 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 and Chester Counties, Philadelphia, and the suburban areas to the west and south of Philadelphia, including southern New Jersey.

Through an extensive highway network, the economies of Delaware and Chester Counties are knitted tightly into a regional economy of more than 2.5 million workers. Delaware and Chester Counties have a large, well-educated, and skilled labor force, with nearly one quarter of the counties’ population having earned a four-year college degree. The median household income of Delaware and Chester 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, and other factors have made the Bank’s primary market area attractive to many large corporate employers, including Comcast, Boeing, State Farm Insurance, United Parcel Service, PECO Energy, SAP America, Inc. and Wawa.

The Philadelphia area economy is typical of many large northeastern cities where the traditional manufacturing-based economy has declined and been replaced by the service sector, including the health care market. Crozer/Keystone Health System, Mercy Health Corp., and Astra-Zeneca are among the larger health care employers within the Bank’s market area. According to the Delaware County Chamber of Commerce, there are more than 65 degree-granting institutions in the Delaware Valley region, representing a higher density of colleges and universities than any other area in the United States.

The population of Delaware County is reported at over half a million residents and is the fifth most populated county in the Commonwealth of Pennsylvania. Much of the growth and development continues to be in the western part of the county and in adjacent Chester County. At September 30, 2008, the unemployment rate in Delaware County was at 5.2%; however, in Chester County the rate was even lower, at 4.1%. This is as compared to the rate for the entire Commonwealth, which also stood at 5.2% as of September 30, 2008. Chester County’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 most rapid 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 attracting deposits.  This competition stems primarily from

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commercial banks, other savings banks and savings associations and mortgage-banking companies.  There are more than 350 financial institution branches located in Delaware and Chester Counties (not including credit unions).  Many of the financial service providers operating in our market area are significantly larger, and have greater financial resources, than us.  We face additional competition for deposits from short-term money market funds and other corporate and government securities funds, mutual funds and from other non-depository financial institutions such as brokerage firms and insurance companies.

Lending Activities

General.  At December 31, 2008, the Bank’s total portfolio 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 first mortgage loans secured by residential property.  However, over the past several years, the Bank has placed an emphasis on loans secured by commercial real estate properties.  Consistent with such approach, commercial real estate loans amounted to $123.5 million or 43.8% of the total loan portfolio at December 31, 2008.  To a significantly lesser extent, the Bank also originates multi-family loans, land and construction loans, consumer loans and commercial business loans.  At December 31, 2008, such loan categories amounted to $1.3 million, $25.3 million, $5.9 million and $9.0 million, respectively, or 0.5%, 9.0%, 2.1% and 3.2% of the total loan portfolio, respectively.

The Bank intends to continue the origination of single-family residential mortgage loans as well as its emphasis on increasing the origination of commercial real estate loans.  For the year ended December 31, 2008, the Bank’s commercial real estate loans increased by $762,000 or 0.6% to $123.5 million. For the year ended December 31, 2008, the Bank’s single-family mortgage loans increased by $5.2 million or 4.7% to $116.7 million.

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

	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

(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, $28.9 million, $22.8 million, and $21.2 million, respectively, of home equity loans and lines.

(3) At December 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, of undisbursed funds on land and construction loans.

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

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

Scheduled contractual amortization of loans does not reflect the expected term of the Bank’s loan portfolio.  The average life of loans is substantially less than their contractual terms because of prepayments and due-on-sale clauses, which gives the Bank the right to declare a conventional loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid.  The average life of mortgage loans tends to increase when current mortgage loan rates are higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgage loans are lower than current mortgage loan rates (due to refinancings of adjustable-rate and fixed-rate loans at lower rates).  Under the latter circumstance, the weighted average yield on the loan portfolio decreases as higher-yielding loans are repaid or refinanced at lower rates.

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The following table shows origination, purchase and sale activity of the Bank with respect to its 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

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

(2)Includes originations of loans 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 are subject to the written, non-discriminatory, underwriting standards and loan origination procedures established by the Bank’s Board of Directors and management.  Loan originations are obtained by a variety of sources, including referrals from real estate brokers, builders, existing customers, advertising, walk-in customers and, to a significant extent, mortgage brokers who obtain credit reports, appraisals and other documentation involved with a loan.  Property valuations are always performed by independent outside appraisers.  Title and hazard insurance are generally required on all security property other than property securing a home equity loan, in which case the Bank obtains a title opinion.  The majority of the Bank’s loans are secured by property located in its primary lending area.

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

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

In accordance with the Bank’s increased emphasis on commercial real estate loan originations, such originations amounted to $33.2 million and $32.9 million during 2008 and 2007, respectively.  In addition, land and construction loan originations amounted to $11.1 million and $9.5 million during 2008 and 2007, respectively.

Since 1999, the Bank has provided single-family residential loan products to borrowers that did not meet the underwriting criteria of the Federal Home Loan Mortgage Corporation (‘FHLMC”) and the Federal National Mortgage Association (“FNMA”) and where the borrower’s credit score is below 660.  The Bank recognizes that these loans, which are considered subprime loans, have additional risk factors as compared to typical single-family residential lending.  These loans are generally not saleable in the secondary market due to the 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’s single-family loan portfolio included $24.1 million or 20.6% and $23.6 million or 21.1%, respectively, of such subprime loans.  The Bank reported $1.9 million or 7.9% and $1.8 million or 7.6% of these loans as non-performing at December 31, 2008 and December 31, 2007, respectively.  The Bank recognizes the additional risk factors associated with subprime lending and utilizes a higher risk-weighting factor in maintaining its allowance for loan losses with respect to these loans. In addition, management calculates and reports the delinquency ratio of its subprime loan portfolio to the Board of Directors on a monthly basis.

Historically, the Bank 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 its primary 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 these loans were reported as non-performing.

Single-Family Residential Real Estate Loans.  The Bank has historically concentrated its lending activities on the origination of loans secured primarily by first mortgage liens on existing single-family residences and intends to continue to originate permanent loans secured by first mortgage liens on single-family residential properties in the future. At December 31, 2008, $116.7 million or 41.4% of the Bank’s total loan portfolio consisted of single-family residential 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 of interest.

The Bank’s ARMs typically provide for an interest rate which adjusts every year after an initial period of three, five, seven or ten years in accordance with a designated index (the national monthly median cost of funds or the weekly average yield on U.S. Treasury securities adjusted to a constant comparable 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 the interest rate is presently limited to 2% per year, with a limit of 6% over the life of the loan.  The Bank’s adjustable-rate loans currently being originated are not assumable.  The Bank has not engaged in the practice of using a cap on the payments that could allow the loan balance to increase rather than decrease, resulting in negative amortization.  The adjustable-rate loans offered by the Bank, like many other financial institutions, provide for initial rates of interest below the rates which would prevail when the index used for repricing is applied.  However, the Bank underwrites the loan on the basis of the borrower’s ability to pay at the initial rate which would be in effect without the discount.  Although the Bank

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continues to emphasize ARMs, such loan products have not been as attractive due to the lower interest rate environment which has recently prevailed and the decrease in the spread between the rates offered on fixed and adjustable rate loans.

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

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

The Bank also offers home equity loans with fixed rates of interest and terms of 15 years or less.  The Bank does not require that it hold the first mortgage on the secured property; however, the balance on all mortgages on the secured property cannot exceed 90% of the value of the secured property.  At December 31, 2008, the Bank held a first lien on a majority of the properties securing home equity loans from the Bank. The Bank has placed an increased emphasis on home equity loans because of their attractive yields and shorter terms to maturity.  At December 31, 2008, home equity loans and lines amounted to $25.6 million or 9.1% of the total loan portfolio, which are included in single family loans.

The Bank is permitted to lend up to 100% of the appraised value of the real property securing a residential loan; however, if the amount of a residential loan originated or refinanced exceeds 90% of the appraised value, the Bank is required by federal regulations to obtain private mortgage insurance on the portion of the principal amount that exceeds 80.0% of the appraised value of the security property, with the exception of home equity loans and lines.  Pursuant to underwriting guidelines adopted by the Board of Directors, the Bank will lend up to 95% of the appraised value of the property securing a single-family residential loan, and requires borrowers to obtain private mortgage insurance on the portion of the principal amount of the loan that exceeds 80% of the appraised value of the security property.  In addition, the Bank will lend up to 90% of the appraised value with no private mortgage insurance required for home equity loans and lines.

Multi-Family Residential and Commercial Real Estate Loans.  The Bank originates and, to a lesser extent, purchases mortgage loans for the acquisition and refinancing of existing multi-family residential and commercial real estate properties.  At December 31, 2008, $1.3 million or 0.5% of the Bank’s total loan portfolio consisted of loans secured by existing multi-family residential real estate.  Commercial real estate loans increased from $122.7 million or 47.2% of the 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 to the Bank’s strategy to increase such lending.  The Bank intends to continue to place an increased emphasis on this type of lending.

The majority of the Bank’s multi-family residential loans are secured primarily by five to fifteen unit apartment buildings, while the Bank’s commercial real estate loans are primarily secured by office buildings, hotels, small retail establishments, restaurants and other facilities.  These types of properties constitute the majority of the Bank’s commercial real estate loan portfolio.  The majority of the multi-family residential and commercial real estate loan portfolio at December 31, 2008 was secured by properties located in the Bank’s primary market area.  The five largest multi-family or commercial real estate loan relationships at December 31, 2008 amounted to $5.8 million, $5.7 million, $4.2 million, $3.9 million and $3.7 million, respectively, all of which were performing in accordance with their terms and were current at such date.

Multi-family and commercial real estate loans are made on terms up to 30 years, some of which include call or balloon provisions ranging from five to 15 years.  The Bank will originate and purchase these loans either with fixed interest rates or with interest rates which adjust in accordance with a designated index.  Loan to value ratios on the Bank’s multi-family and commercial real estate loans are typically limited to 80%.  As part of the criteria for underwriting multi-family and commercial real estate loans, the Bank generally imposes a debt coverage ratio (the ratio of net cash from operations before payment of debt service to debt service) of not less than 1.1.  It is also the Bank’s general policy to obtain corporate or personal guarantees, as applicable, on its multi-family residential and commercial real estate loans from the principals of the borrower.

Multi-family and commercial real estate lending entails significant additional risks as compared with single-family

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residential property lending.  Such loans typically involve large loan balances to single borrowers or groups of related borrowers.  The payment experience on such loans is typically dependent on the successful operation of the real estate project.  The success of such projects is sensitive to changes in supply and demand conditions in the market for multi-family and commercial real estate as well as economic conditions generally.  At December 31, 2008, the Bank had no non-performing multi-family loans and 12 non-performing commercial real estate loans which amounted to $3.6 million.

Construction Loans.  The Bank also originates residential and commercial construction loans, and to a limited degree, land acquisition and development loans.  Construction loans are classified as either residential construction loans 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 activities generally are limited to the Bank’s primary market area.  At December 31, 2008, construction loans amounted to $25.3 million or 8.9% of the Bank’s total loan portfolio, which consisted of $16.4 million of residential and $8.9 million of commercial real estate construction loans.

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

The Bank’s commercial construction loans are generally made to local developers and others for the purpose of developing commercial real estate properties such as small office buildings and hotels, storage facilities and commercial building renovations.  The application, credit review and disbursement process are similar to those mentioned above for the Bank’s residential construction loans.   The three largest real estate construction loans had outstanding balances of $4.6 million, $3.8 million, and $3.5 million as of December 31, 2008.  The $4.6 million loan is a land and development loan for a mixed use commercial real estate project located in Bradenton, Florida which is just south of Tampa.  The other two loans are residential construction projects located in Philadelphia, Pennsylvania and are both classified as special mention due to slower than anticipated sales.

The Bank’s construction loans generally have maturities of 12 to 36 months, with payments being 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 on the prime rate plus a margin of up to 2.0%. Residential and commercial real estate construction loans are generally made with maximum loan to value ratios of 80% and 75%, respectively, on an as completed basis.

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

The Bank has attempted to minimize the foregoing risks by, among other things, limiting the extent of its construction lending and has adopted underwriting guidelines which impose stringent loan-to-value, debt service and other requirements for loans which are believed to involve higher elements of credit risk, by limiting the geographic area in which the Bank will do business and by working with builders with whom it has established relationships.  At December 31, 2008, the Bank had one non-performing construction loan which had an outstanding balance of $896,000.  In February 2009, this loan was transferred to other real estate owned at a carrying amount of $896,000, which approximates fair value.

Consumer Loans.  The Bank offers consumer loans in order to provide a full range of financial services to its customers and because such loans generally have shorter terms and higher interest rates than mortgage loans.  The consumer loans presently offered by the Bank include student loans, deposit account secured loans and lines of credit.  Consumer loans amounted to $5.9 million or 2.1% of the total loan portfolio at December 31, 2008.  Student loans amounted to $5.5 million or 1.9% of the total loan portfolio at December 31, 2008.  Such loans are made to local students for a term of ten years, presently with adjustable interest rates.  The interest rate is determined by the U.S. Department of Education.  Loan repayment obligations do not begin until the student has completed his or her

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education.  The principal 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% of the account balance, with a hold placed on the account restricting the withdrawal of the account balance.

Consumer loans generally have shorter terms and higher interest rates than mortgage loans but generally involve more credit risk than mortgage loans because of the type and nature of the collateral and, in certain cases, the absence of collateral.  In addition, consumer lending collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely effected by job loss, divorce, illness and personal bankruptcy.  In most cases, any repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan balance because of improper repair and maintenance of the underlying security.  The remaining deficiency often does not warrant further substantial collection efforts against the borrower.  The Bank believes that the generally higher yields earned on consumer loans compensate for the increased credit risk associated with such loans and that consumer loans are important to its efforts to provide a full range of services to its customers.

Commercial Business Loans.  In September 1997, the Bank opened a commercial loan department to provide a full range of commercial loan products to small business customers in its primary marketing area.  These loans generally have shorter terms and higher 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 primarily secured by inventories and other business assets.

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

Loan Fee Income.  In addition to interest earned on loans, the Bank receives income from fees in connection with loan originations, loan modifications, late payments, prepayments and for miscellaneous services related to its loans.  Income from these activities varies from period to period with the volume and type of loans made and competitive conditions. The Bank charges loan origination fees which are calculated as a percentage of the amount borrowed.  Loan origination and commitment fees and all incremental direct loan origination costs are deferred and recognized over the contractual remaining lives of the related loans on a level yield basis.  Discounts and premiums on loans purchased are amortized in the same manner.

Asset Quality

Loans are placed on non-accrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual.  When a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income.  The Bank does not accrue interest on real estate loans past due 90 days or more unless, in the opinion of management, the value of the property securing the loan exceeds the outstanding balance of the loan (principal, interest and escrows) and collection is probable.  The Bank provides 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 for uncollected interest.  Loans may be reinstated to accrual status when all payments are brought current and, in the opinion of management, collection of the remaining balance can be reasonably expected.

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

Under accounting principles generally accepted in the United States of America (“GAAP”), the Bank is required to account for certain loan modifications or restructurings as “troubled debt restructurings.”  In general, the modification or restructuring of a debt constitutes a troubled debt restructuring if the Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that the Bank would not otherwise consider.  Debt restructurings or loan modifications for a borrower do not necessarily always constitute troubled debt restructurings, however, and troubled debt restructurings do not necessarily result in non-accrual loans.  The Bank did not have any troubled debt restructurings as of December 31, 2008.

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Delinquent Loans.  The following table sets forth information concerning delinquent loans at December 31, 2008, in dollar amounts and as a percentage of each category of the Bank’s loan portfolio.  The amounts presented represent the total outstanding principal balances of the related loans, rather than 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’s non-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 gross income on such loans would have been approximately $347,000 for 2008.  The Bank actually recorded $121,000 in interest 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 (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 $7.0 million of nonperforming assets consisted of $1.8 million of accruing loans 90 days or more delinquent, $5.2 million of nonaccrual loans and no other real estate owned. At December 31, 2008, nonperforming loans consisted of $2.5 million in single-family residential real estate loans, $3.6 million in commercial real 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 loans to 8 borrowers that are the result of cash flow stress primarily due to the current economic conditions.  The Bank’s management continues to aggressively pursue the collection and resolution of all delinquent loans.

Classified Assets.  Federal regulations require that each insured savings association classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them.  There are three classifications for problem assets: “substandard,” “doubtful” and “loss.”  Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected.  Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss.  An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.  Another category designated “special mention” also must be established and maintained for assets which do not currently expose an insured institution to a sufficient degree of risk to warrant classification as substandard, doubtful or loss.

At December 31, 2008, the Bank had $17.6 million of classified assets, of which $10.7 million consisted of loans classified as special mention, $6.9 million consisted of loans classified as substandard, and no loans classified as doubtful.  The $10.7 million of loans classified as special mention consisted of $285,000 in commercial real estate loans, $9.0 million in residential real estate construction loans, and $1.4 million in commercial business loans.  The $9.0 million in residential real estate construction includes five loans to three borrowers all located in the Bank’s primary market area which have been classified as special mention due to slower than anticipated sales.  The $6.9 million of loans designated as substandard consisted of $2.4 million of single-family real estate loans, $3.6 million in commercial real estate loans and $896,000 in residential real estate construction loans.  The Company does not knowingly lend to subprime borrowers, except as disclosed in “Origination, Purchase and Sale of Loans”, and has not been materially directly impacted by the current subprime crisis as of December 31, 2008.

Allowance for Loan Losses.  The allowance for loan losses is increased by charges to income and decreased by chargeoffs (net of recoveries).  Allowances are provided for specific loans when 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 collateralizing the loan.  Current and future operating and/or sales conditions are also considered.  These estimates are susceptible to changes that could result in material adjustments to results of operations.  Recovery of the carrying value of such loans is dependent to a great extent on economic, operating and other conditions that may be beyond management’s control.

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

Impaired loans are predominantly measured based on the fair value of the collateral.  The provision for loan losses charged to expense is based upon past loan loss experience and an evaluation of probable losses and impairment existing in the current loan portfolio.  A loan is considered to be impaired when, based upon current information and events, it is probable that the Bank will be unable to collect all amounts due according to the original contractual terms of the loan.  An insignificant delay or insignificant shortfall in amounts of payments does not necessarily result in the loan being identified as impaired.  For this purpose, delays less than 90 days are considered to be insignificant.  Large groups of smaller balance homogeneous loans, including residential real 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 make determinations with respect to the provisions for loan losses, additional provisions for loan losses may be required to be established in the future should economic or other conditions change substantially.  In addition, the Pennsylvania Department of Banking 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 to recognize additions to such allowance based on their judgments about information available to them at the time of their examination.

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The following table summarizes changes in the allowance for loan losses and 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.

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The following table presents the allocation of the allowance for loan losses to the total amount 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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Investment Activities

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

The FHLMC is a public corporation chartered by the U.S. Government.  The FHLMC issues participation certificates backed principally by conventional mortgage loans.  The FHLMC guarantees the timely payment of interest and the ultimate return of principal within one year.  The FNMA is a private corporation chartered by the U.S. Congress with a mandate to establish a secondary market for conventional mortgage loans.  The FNMA guarantees the timely payment of principal and interest on FNMA securities.  FHLMC and FNMA securities are not backed by the full faith and credit of the United States, but because the FHLMC and the FNMA are U.S. Government sponsored enterprises, these securities are considered high quality investments with minimal credit risks.  The GNMA is a government agency within the Department of Housing and Urban Development which is intended to help finance government assisted housing programs.  GNMA securities are backed by FHA-insured and VA-guaranteed loans, and the timely payment of principal and interest on GNMA securities are guaranteed by the GNMA and backed by the full faith and credit of the U.S. Government.  Because the FHLMC, the FNMA and the GNMA were established to provide support for low- and middle-income housing, there are limits to the maximum size of loans that qualify for these programs.  For example, the FNMA and the FHLMC currently limit their loans secured by a single-family, owner-occupied residence to $417,000.  To accommodate larger-sized loans, and loans that, for other reasons, do not conform to the agency programs, a number of private institutions have established their own home-loan origination and securitization programs.

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

The following table sets forth the fair value of the Bank’s mortgage-backed securities portfolio 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 gross unrealized losses amounted to $157,000.

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

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

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The following table sets forth the purchases, sales and principal repayments of the Bank’s mortgage-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’s assets by virtue of the insurance or guarantees that back them, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Bank.  At December 31, 2008, $5.6 million of the Bank’s mortgage-backed securities were pledged to secure various obligations of the Bank.  See Note 4 to the Consolidated Financial Statements.  The Company does not knowingly invest in subprime financial instruments, and has not been materially impacted by the current subprime crisis as of December 31, 2008.

Information regarding the contractual maturities and weighted average yield of the Bank’s mortgage-backed securities portfolio at December 31, 2008 is presented below.

	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) All mortgage-backed securities are designated as available for sale.

The actual maturity of a mortgage-backed security is typically less than its stated maturity due to prepayments of the underlying mortgages.  Prepayments that are faster than anticipated may shorten the life of the security and increase or decrease its yield to maturity if the security was purchased at a discount or premium, respectively.  The yield is based upon the interest income and the amortization of any premium or discount related to the mortgage-backed security.  In accordance with accounting principles generally accepted in the United States of America, premiums and discounts are amortized over the estimated lives of the loans, which decrease and increase interest income, respectively.  The prepayment assumptions used to determine the amortization period for premiums and discounts can significantly affect the yield of the mortgage-backed security, when premiums or discounts are involved, and these assumptions are reviewed periodically to reflect actual prepayments.  Although prepayments of underlying mortgages depend on many factors, including the type of mortgages, the coupon rate, the age of mortgages, the geographical location of the underlying real estate collateralizing the mortgages and general levels of market interest rates, the difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates generally is the most significant determinant of the rate of prepayments.  During periods of falling mortgage interest rates, if the coupon rate of the underlying mortgages exceeds the prevailing market interest rates offered for mortgage loans, refinancing

18

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

Investment Securities.  The investment policy of the Bank, as established by the Board of Directors, is designed primarily to provide and maintain liquidity and to generate a favorable return on investments without incurring undue interest rate risk, credit risk, and investment portfolio asset concentrations.  The Bank’s investment policy takes into account the Bank’s business plan, interest rate management, the current economic environment, the types of securities to be held and other safety and soundness considerations.  The Bank’s investment policy is currently implemented by the Chief Executive Officer and reviewed and evaluated by the Asset Liability Committee.  The Asset Liability Committee is required to issue a written compliance report to the Board of Directors at least quarterly.

The Bank is authorized to invest in obligations issued or fully guaranteed by the U.S. Government, certain federal agency obligations, insured municipal obligations, certain mutual funds, investment grade corporate debt securities 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 its investment securities as available for sale in order to respond to changes in market rates, increases in loan demand, and changes in liquidity needs.

The following table sets forth certain information relating to the Bank’s investment securities 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 were designated as available for sale.  At December 31, 2008, gross unrealized losses amounted to $13,000 and there were $379,000 in gross unrealized gains.  At December 31, 2008, $4.0 million or 10.7% of the Bank’s investment securities were pledged to secure various obligations of the Bank.  See Note 3 to the Consolidated Financial Statements.

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

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Information regarding the contractual maturities and weighted average yield of the Bank’s investment securities portfolio at December 31, 2008 is presented below.  Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations 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 $37.4 million of U.S. Government agency securities are designated as available for sale.

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

Sources of Funds

General.  Deposits are the primary source of the Bank’s funds for lending and other investment purposes.  In addition to deposits, the Bank derives funds from loan principal repayments, prepayments and advances from the Federal Home Loan Bank (“FHLB”) of Pittsburgh.  Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions.  Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources.  They may also be used on a longer term basis for general business purposes.

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

The Bank considers its primary market area to be Delaware and Chester counties, Pennsylvania.  The Bank attracts deposit accounts by offering a wide variety of accounts, competitive interest rates, and convenient office locations and service hours.  In addition, the Bank maintains automated teller machines at its Broomall, Glen Mills, Havertown, Springfield, Lansdowne, Paoli, and Secane offices.  The Bank utilizes traditional marketing methods to attract new customers and savings deposits, including print media advertising and direct mailings.  The Bank does not advertise for deposits outside of its primary market area or utilize the services of deposit brokers, and management believes that an insignificant number of deposit accounts were held by non-residents of Pennsylvania at December 31, 2008.

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

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The following table shows the distribution of, and certain other information relating to, the Bank’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 following table sets forth the net deposit flows of the Bank during the periods indicated.

	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 following table sets forth maturities of the Bank’s certificates of deposit of $100,000 or 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 following table presents the average balance of each deposit type and the average rate paid 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) Reflects average rate paid on total interest bearing deposits.

The following table presents, by various interest rate categories, the amount of certificates of deposit at December 31, 2008 and 2007 and the amounts 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 of Pittsburgh upon the security of the common stock it owns in that bank and certain of its loans, provided certain standards related to creditworthiness have been met. Such advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities.  Such advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending.  At December 31, 2008, the Bank 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 associated with substantially all of the Bank’s FHLB advances.  The weighted average interest rate of the Bank’s FHLB advances was 6.30% as of December 31, 2008.  The Bank is reviewing its continued utilization of advances from the FHLB as a source of funding based upon recent decisions by the FHLB to suspend the dividend on, and restrict the repurchase of, FHLB stock.  FHLB stock is required to be held when advances from the FHLB are taken.

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The following table sets forth certain information regarding borrowed funds at or for the dates 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 70 full-time employees and 32 part-time employees at December 31, 2008.  None of these employees is represented by a collective bargaining agent, and the Bank believes that it enjoys good relations with its personnel.

Subsidiaries

Presently, the Bank has two wholly-owned subsidiaries, Alliance Delaware Corp., which holds and manages certain investment securities and Alliance Financial and Investment Services LLC which participates in commission fees. Alliance Delaware Corp. was formed in 1999 to accommodate the transfer of certain assets that are legal investments for the Bank and to provide for a greater degree of protection to claims of creditors. The laws of the State of Delaware and the court system create a more favorable environment for the business affairs of the subsidiary.  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 Services LLC was established in 2003 to share in commission fees from non-insured alternative investment products.

Competition

The Bank faces strong competition both in attracting deposits and making real estate loans.  Its most direct competition for deposits has historically come from other savings associations, credit unions and commercial banks located in eastern Pennsylvania, including many large financial institutions, which have greater financial and marketing resources available to them.  In addition, during times of high interest rates, the Bank has faced additional significant competition 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 retain savings deposits depends on its ability to generally provide a rate of return, liquidity and risk comparable to that offered by competing investment opportunities.

The Bank experiences strong competition for real estate loans principally from other savings associations,

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commercial banks and mortgage banking companies.  The Bank competes for loans principally through the interest rates and loan fees it charges and the efficiency and quality of services it provides borrowers.  Competition may increase as a result of the continuing reduction of restrictions on the interstate operations of financial institutions.

REGULATION

General.  Alliance Bancorp and Alliance Mutual Holding Company, as federally-chartered savings and loan holding companies, are required to file certain reports with, and are subject to examination by, and otherwise must comply with the rules and regulations of the Office of Thrift Supervision. Alliance Bancorp is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Alliance Bank is a Pennsylvania-chartered savings bank and is subject to extensive regulation and examination by the Pennsylvania Department of Banking and by the FDIC, and is also subject to certain requirements established by the Federal Reserve Board.  The federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans.  There are periodic examinations by the Pennsylvania Department of Banking and the FDIC to test Alliance Bank’s compliance with various regulatory requirements.  This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors.  The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.  Any change in such regulation, whether by the Pennsylvania Department of Banking, the FDIC or the Congress could have a material adverse impact on Alliance Bancorp, Alliance Bank and Alliance Mutual Holding Company and their operations.

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

Regulation of Alliance Bank

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

One of the purposes of the Banking Code is to provide savings banks with the opportunity to be competitive with each other and with other financial institutions existing under other Pennsylvania laws and other state, federal and foreign laws.  A Pennsylvania savings bank may locate or change the location of its principal place of business and establish an office anywhere in the Commonwealth, with the prior approval of the Department.

The Department generally examines each savings bank not less frequently than once every two years.  Although the Department may accept the examinations and reports of the FDIC in lieu of its own examination, the present practice is for the Department to conduct individual examinations.  The Department may order any savings bank to discontinue any violation of law or unsafe or unsound business practice and may direct any trustee, officer, attorney or employee of a savings bank engaged in an objectionable activity, after the Department has ordered the activity to be terminated, to show cause at a hearing before the Department why such person should not be removed.

Emergency Economic Stabilization Act of 2008. The U.S. Congress adopted, and on October 3, 2008, President George W. Bush signed, the Emergency Economic Stabilization Act of 2008 (“EESA”) which authorizes the United States Department of the Treasury, to purchase from financial institutions and their holding companies up to $700 billion in mortgage loans, mortgage-related securities and certain other financial instruments, including debt and equity securities issued by financial institutions and their holding companies in a troubled asset relief program. The purpose of the troubled asset relief program is to restore confidence and stability to the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other. The troubled asset relief

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program is also expected to include direct purchases or guarantees of troubled assets of financial institutions. The Treasury Department has allocated $250 billion towards a capital purchase program. Under the capital purchase program, the Treasury Department will purchase debt or equity securities from participating institutions. We have elected not to participate in the capital purchase program.

The Federal Deposit 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) of the Federal Deposit Insurance Act, the Federal Deposit Insurance Corporation has implemented two temporary programs to provide deposit insurance for the full amount of most non-interest bearing transaction deposit accounts through the end of 2009 and to guarantee certain unsecured debt of financial institutions and their holding companies through June 2012. For non-interest bearing transaction deposit accounts, including accounts swept from a non-interest bearing transaction account into a non-interest bearing savings deposit account, a 10 basis point annual rate surcharge will be applied to deposit amounts in excess of $250,000. Financial institutions could have opted out of either or both these two programs. We did not opt out of the temporary liquidity guarantee program; however, we do not expect that the assessment surcharge will have a material impact on our results of operations.

Insurance of Accounts . The deposits of Alliance Bank are insured to the maximum extent permitted by the Deposit Insurance Fund and are backed by the full faith and credit of the U.S. Government. As insurer, the Federal Deposit Insurance Corporation is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious threat to the Federal Deposit Insurance Corporation. The Federal Deposit Insurance Corporation also has the authority to initiate enforcement actions against savings institutions, after giving the Office of Thrift Supervision an opportunity to take such action.

Under regulations effective January 1, 2007, the FDIC adopted a new risk-based premium system that provides for quarterly assessments based on an insured institution’s ranking in one of four risk categories based upon supervisory and capital evaluations.  Well-capitalized institutions (generally those with CAMELS composite ratings of 1 or 2) are grouped in Risk Category I and assessed for deposit insurance at an annual rate of between five and seven basis points.  The assessment rate for an individual institution is determined according to a formula based on a weighted average of the institution’s individual CAMEL component ratings plus either five financial ratios 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 at annual rates of 10, 28 and 43 basis points, respectively.

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

The Federal Deposit Insurance Corporation may terminate the deposit insurance of any insured depository institution, including Alliance Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the Federal Deposit Insurance Corporation. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the Federal Deposit Insurance Corporation. Management is aware of no existing circumstances which would result in termination of Alliance Bank’s deposit insurance.

On October 16, 2008, the Federal Deposit Insurance Corporation published a restoration plan designed to replenish the Deposit Insurance Fund over a period of five years and to increase the deposit insurance reserve ratio, which decreased to 1.01% of insured deposits on June 30, 2008, to the statutory minimum of 1.15% of insured deposits by December 31, 2013. In order to implement the restoration plan, the Federal Deposit Insurance Corporation proposes to change both its risk-based assessment system and its base assessment rates. Assessment rates would increase by seven basis points across the range of risk weightings of depository institutions. Changes to the risk-based assessment system would include increasing premiums for institutions that rely on excessive amounts of brokered deposits, including CDARS, increasing premiums for excessive use of secured liabilities, including Federal Home Loan Bank advances, lowering premiums for smaller institutions with very high capital levels, and adding financial ratios and debt issuer ratings to the premium calculations for banks with over $10 billion in assets, while providing a reduction for their unsecured debt.  Higher assessments for well-managed and well-capitalized institutions that rely significantly on brokered-deposits will apply only when accompanied by rapid asset growth.

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On February 27, 2009, the FDIC also adopted an interim rule imposing a 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 additional special assessment after June 30, 2009, of up to 10 basis points, if necessary to maintain public confidence in federal deposit insurance.  However, FDIC Chairman Bair has indicated in a letter to Senate Banking Committee Chairman Dodd that, if the U.S. Congress passes a bill increasing the FDIC’s authority to borrow from the U.S. Department of Treasury, the FDIC would reduce the proposed special assessment.  The U.S. Congress is currently considering the legislation on such increase in borrowing authority.

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

The FDIC’s capital regulations establish a minimum 3.0% Tier I leverage capital requirement for the most highly-rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively will increase the minimum Tier I leverage ratio for such other banks to 4.0% to 5.0% or more.  Under the FDIC’s regulation, highest-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization and are rated composite 1 under the Uniform Financial Institutions Rating System.  Leverage or core capital is defined as the sum of common stockholders’ equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain qualifying supervisory goodwill and certain purchased mortgage servicing rights.

The FDIC also requires that savings banks meet a risk-based capital standard.  The risk-based capital standard for savings banks requires the maintenance of total capital (which is defined as Tier I capital and supplementary (Tier 2) capital) to risk weighted assets of 8%.  In determining the amount of risk-weighted assets, all assets, plus certain off balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item.  The components of Tier I capital are equivalent to those discussed above under the 3% leverage capital standard.  The components of supplementary capital include certain perpetual preferred stock, certain mandatory convertible securities, certain subordinated debt and intermediate preferred stock and general allowances for loan and lease losses.  Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.  Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital.

Alliance Bank is also subject to more stringent Department capital guidelines.  Although not adopted in regulation form, the Department utilizes capital standards requiring a minimum of 6% leverage capital and 10% risk-based capital.  The components of leverage and risk-based capital are substantially the same as those defined by the FDIC.

At December 31, 2008, Alliance Bank’s capital ratios exceeded each of its capital requirements.

Activities and Investments of Insured State-Chartered Banks.  The activities and equity investments of FDIC-insured, state-chartered banks are generally limited to those that are permissible for national banks.  Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank.  An insured state bank is not prohibited from, among other things:

·acquiring or retaining a majority interest in a subsidiary;

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

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

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

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

Restrictions on Capital Distributions.  Office of Thrift Supervision regulations govern capital distributions by savings institutions, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings institution to make capital distributions.  These regulations apply to Alliance Mutual Holding Company and Alliance Bancorp.  Under applicable regulations, a savings institution must file an application for Office of Thrift Supervision approval of the capital distribution if:

·the total capital distributions for the applicable calendar year exceed the sum of the institution’s net income for that year to date plus the institution’s retained net income for the preceding two years;

·the institution would not be at least adequately capitalized following the distribution;

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

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

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

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

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

Privacy Requirements of the Gramm-Leach-Bliley Act.  Federal law places limitations on financial institution like Alliance Bank regarding the sharing of consumer financial information with unaffiliated third parties.  Specifically, these provisions requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of personal financial information with unaffiliated third parties.  Alliance Bank currently has a privacy protection policy in place and believes such policy is in compliance with the regulations.

Anti-Money Laundering.  Federal anti-money laundering rules impose various requirements on financial institutions intends to prevent the use of the U.S. financial system to fund terrorist activities.  These provision include a requirement that financial institutions operating in the United States have anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such compliance programs supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations.  Alliance Bank has established policies and procedures to ensure compliance with the federal anti-laundering provisions.

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Regulatory Enforcement Authority.  Applicable banking laws include substantial enforcement powers available to federal banking regulators.  This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined.  In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices.  Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

Regulation of Alliance Bancorp and Alliance Mutual Holding Company

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

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

·investing in the stock of a savings institution;

·acquiring a mutual association through the merger of such association into a savings institution subsidiary of such holding company or an interim savings institution subsidiary of such holding company;

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

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

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

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

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

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

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

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Qualified Thrift Lender Test.  A savings association can comply with the Qualified Thrift Lender test by either meeting the Qualified Thrift Lender test set forth in the Home Owners’ Loan Act and implementing regulations or qualifying 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 and loan holding company that does not comply with the Qualified Thrift Lender test must comply with the following restrictions on its operations:

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

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

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

Upon the expiration of three years from the date the institution ceases to meet the Qualified Thrift Lender test, it must cease any activity and not retain any investment not permissible for a national bank (subject to safety and soundness considerations).

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

Limitations on Transactions with Affiliates.  Transactions between savings institutions and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act.  An affiliate of a savings institution is any company or entity which controls, is controlled by or is under common control with the savings institution.  In a mutual holding company context, the mutual holding company and mid-tier holding company of a savings institution (such as Alliance Bancorp and Alliance Mutual Holding Company) and any companies which are controlled by such holding companies are affiliates of the savings institution.  Generally, Section 23A limits the extent to which the savings institution or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus.  Section 23B applies to “covered transactions” as well as certain other transactions and requires that all transactions be on terms substantially the same, or at least as favorable, to the savings institution as those provided to a non-affiliate.  The term “covered transaction” includes the making of loans to, purchase of assets from and issuance of a guarantee to an affiliate and similar transactions.  Section 23B transactions also include the provision of services and the sale of assets by a savings institution to an affiliate.  In addition to the restrictions imposed by Sections 23A and 23B, Section 11 of the Home Owners’ Loan Act prohibits a savings institution from (i) making a loan or other extension of credit to an affiliate, except for any affiliate which engages only in certain activities which are permissible for bank holding companies, or (ii) purchasing or investing in any stocks, bonds, debentures, notes or similar obligations of any affiliate, except for affiliates which are subsidiaries of the savings institution.

In addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal stockholders.  Under Section 22(h), loans to a director, an executive officer and to a greater than 10% stockholder of a savings institution, and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the savings institution’s loans to one borrower limit (generally equal to 15% of the institution’s unimpaired capital and surplus).  Section 22(h) also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of the institution and (ii) does not give preference to any director, executive officer or principal stockholder, or certain affiliated interests of either, over other employees of the savings institution.  Section 22(h) also requires prior board approval for certain loans.  In addition, the aggregate amount of extensions of credit by a savings institution to all insiders cannot exceed the institution’s unimpaired capital and surplus.  Furthermore, Section 22(g) places additional restrictions on loans to executive officers.  At December 31, 2007, Alliance Bank was in compliance with the above restrictions.

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

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The Director of the Office of Thrift Supervision may only approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings institutions in more than one state if (i) the multiple savings and loan holding company involved controls a savings institution which operated a home or 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 savings institution pursuant to the emergency acquisition provisions of the Federal Deposit Insurance Act ; or (iii) the statutes of the state in which the institution to be acquired is located specifically permit institutions to be acquired by the state-chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions).

Waivers of Dividends by Alliance Mutual Holding Company.  It is the policy of a number of mutual holding companies to waive the receipt of dividends declared by their subsidiary companies.  Office of Thrift Supervision regulations require Alliance Mutual Holding Company to notify the Office of Thrift Supervision of any proposed waiver of its receipt of dividends from Alliance Bancorp.  The Office of Thrift Supervision reviews dividend waiver notices on a case-by-case basis, and, in general, does not object to any such waiver if the waiver of cash dividends would not be detrimental to the safe and sound operation of the subsidiary institution.  The Company has, and anticipates in the future, that Alliance Mutual Holding Company will waive dividends paid by it.  Under Office of Thrift Supervision regulations, public stockholders are not diluted because any dividends waived by a mutual holding company are not considered in determining an appropriate exchange ratio in the event the mutual holding company converts to stock form.

A condition imposed on Alliance Bank by the FDIC in connection with its formation of a mutual holding company required that (1) any dividends waived by the mutual holding company must be retained by the Bank and segregated, earmarked, or otherwise identified on the books and records, and (2) that in the event of a conversion of the mutual holding company to stock form the amount of waived dividends must be taken into account in any valuation of the Bank and mutual holding company and factored into the calculation used in establishing a fair and reasonable basis for exchanging Bank shares for holding company shares, and that such amounts would not be available for payment to minority shareholders of the Bank by any means, including through dividend payments or at liquidation.  The previously imposed condition described above remains enforceable.

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

As a member, Alliance Bank is required to purchase and maintain stock in the Federal Home Loan Bank of Pittsburgh in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase 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 was in compliance with this requirement.

Federal Reserve Board System.  The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts, which are primarily checking and NOW accounts, and non-personal time deposits.  The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the Pennsylvania Department of Banking.  At December 31, 2008, Alliance Bank was in compliance with these reserve requirements.

FEDERAL AND STATE TAXATION

General.  Alliance Bancorp, Alliance Mutual Holding Company and Alliance Bank are subject to federal income tax provisions of the Internal Revenue Code of 1986, as amended, in the same general manner as other corporations with some exceptions listed below.  For federal income tax purposes, Alliance Bancorp files a consolidated federal income tax return with its wholly owned subsidiaries on a fiscal year basis.  The applicable federal income tax expense or benefit will be properly allocated to each subsidiary based upon taxable 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 federal income tax return with Alliance Bancorp and/or Alliance Bank.

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

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Bad Debt Reserves.  The Small Business Job Protection Act of 1996 eliminated the use of the reserve method of accounting for bad debt reserves by savings institutions, effective for taxable years beginning after 1995.  Prior to that time, Alliance Bank was permitted to establish a reserve for bad debts and to make additions to the reserve.  These additions could, within specified formula limits, be deducted in arriving at taxable income.  As a result of the Small Business Job Protection Act, savings associations must use the specific chargeoff method in computing their bad debt deduction beginning with their 1996 federal tax return.

Taxable Distributions and Recapture.  Prior to the Small Business Job Protection Act, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income if Alliance Bank failed to meet certain thrift asset and definitional tests.  New federal legislation eliminated these thrift related recapture rules.  However, under current law, pre-1988 reserves remain subject to recapture should Alliance Bank make certain non-dividend distributions or cease to maintain a savings bank charter.

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

Minimum Tax.  The Internal Revenue Code imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax preferences (“alternative minimum taxable income” or “AMTI”).  The AMT is payable to the extent such AMTI is in excess of an exemption amount.  Net operating losses can offset no more than 90% of AMTI.  Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years.  Alliance Bank has been subject to the AMT and as of December 31, 2008, had $1.2 million of AMT available as credit for carryover purposes.

Net Operating Loss Carryovers.  Net operating losses incurred in taxable years beginning before August 6, 1997 may be carried back to the three preceding taxable years and forward to the succeeding 15 taxable years.  For net operating losses in years beginning after August 5, 1997, other than 2001 and 2002, such net operating losses can be carried back to the two preceding taxable years and forward to the succeeding 20 taxable years.  Net operating losses arising in 2001 or 2002 may be carried back five years and may be carried forward 20 years.  At December 31, 2008, Alliance Bank had no net operating loss carryforwards respectively, for federal income tax purposes.

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

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

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

Item 1A.  Risk Factors

Not applicable

Item 1B.  Unresolved Staff Comments

None

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Item 2.  Properties.

Offices and Properties

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

The following table sets forth certain information with 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

(1) The lease expires in February 2010.

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

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

(4) The lease expires in January 2011 with two successive options to extend the lease for five years each.

(5) The lease expires in September 2015.

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

(7) The lease expires May 2012.

Item 3.  Legal Proceedings.

The Company is not involved in any pending legal proceedings other than nonmaterial legal proceedings occurring in the ordinary course of business.

Item 4.  Submission of Matters to a Vote of Security Holders.

Not applicable.

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PART II.

ITEM 5.  MARKET FOR COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES.

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

Item 6.  Selected Financial Data.

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The selected consolidated financial and other data of Alliance Bancorp, Inc. of Pennsylvania set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the Consolidated Financial Statements and related 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 on Following 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

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

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

(3)Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities, and net interest margin represents net interest income as a percentage of average interest-earning assets.

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

(5)The efficiency ratio is calculated by dividing other expenses by the sum of net interest income and other income.

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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Alliance Bancorp, Inc. of Pennsylvania is a bank holding 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 offices located in Delaware and Chester Counties, which are suburbs of Philadelphia.  Our primary business consists of attracting deposits from the general public and using those funds, together with funds we borrow, to originate loans to our customers and invest in securities such as U.S. Government and agency securities, mortgage-backed securities and municipal obligations.  At December 31, 2008, we had $424.1 million of total assets, $331.7 million of total deposits and stockholders’ equity of $48.9 million.

On January 30, 2007, the Bank completed a reorganization to a mid-tier holding company structure and the sale by the mid-tier company, Alliance Bancorp, Inc. of Pennsylvania (“Alliance Bancorp” or the “Company”) of shares of its common stock.  In the reorganization and offering, the Company sold 1,807,339 shares of common stock at a purchase price of $10.00 per share and issued 5,417,661 shares of common stock in exchange for former outstanding shares of the Bank.  Each share of the Bank’s common stock was converted into 2.09945 shares of the Company’s common stock.  The offering resulted in approximately $16.5 million in net proceeds to the Company.

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

The Bank is subject to regulation by the Pennsylvania Department of Banking (the “Department”), as its chartering authority and primary 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 market penetration in our existing market areas by increasing the products and services we offer, incentivizing our employees to cross-sell our products and emphasizing customer service in an effort to capture more of each customer’s banking relationships.  In addition to organic growth, we continue to evaluate market expansion opportunities.  Though net proceeds from the offering has facilitated our ability to consider additional new offices, either on a de novo basis or through acquisitions, we currently have no plans, agreements or understandings with respect to any acquisitions.

Emphasizing Business Banking Operations.  We intend to hire additional loan officers and have increased our calls on local builders and other local businesses in an effort to increase our business banking relationships.  As a locally based bank, we believe that we offer a high level of customer service and a quick loan application and approval process which is attractive to many local, small to medium sized businesses.

Emphasizing Commercial Real Estate and Construction Loans.  At December 31, 2008, $123.5 million or 43.8% of our total loan portfolio consisted of commercial real estate loans.  In addition, at such date, we had $25.3 million of construction loans.  Commercial real estate and construction loans are attractive because they generally provide us with higher average yields than single-family residential mortgage loans and they typically have adjustable rates of interest and/or shorter terms to maturity than traditional single-family residential mortgage loans.  The net proceeds from the offering increased our capital and will facilitate 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 estate and construction lending in a manner consistent with our loan underwriting policies and procedures.

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

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

Increasing Core Deposits.  We intend to increase our core deposits in order to reduce our cost of funds.  The Bank offers a wide variety of deposits to its customers and is competitive in the rates it offers although it does not necessarily seek to match the highest rates paid by competitors.  The Bank also promotes longer term deposits where 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 may determine to prepay additional borrowings, even if there would be a prepayment penalty, where in the judgment of management any penalty would be offset in a reasonable period through an improved net interest spread.  Management has determined not to repay or refinance such advances at this time because the current prepayment penalties upon early retirement would not be offset in a reasonable period of time through 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 our loan and securities portfolios and interest expense on deposits and borrowings.  Our net interest income is largely determined by our net interest spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities, and the relative amounts of interest-earning assets and interest-bearing liabilities. Results of operations are also affected by our provisions for loan losses, fees and service charges and other non-interest income and non-interest expense.  Non-interest expense principally consists of compensation and employee benefits, office occupancy and equipment expense, data processing, advertising and other expense.  Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities.  Future changes in applicable law, regulations or government policies may materially impact our financial condition and results of operations.

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

Other than Temporary Impairment of Securities.  The Company is required to perform periodic reviews of individual securities in its investment portfolio to determine whether a decline in the fair value of a security is other than temporary.  A review of other than temporary impairment requires management to make certain judgments regarding the nature of the decline, its effect on the financial statements and the probability, extent and timing of a valuation recovery and the Company’s intent and ability to hold the security.  Management evaluates securities for other than temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluations.  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 Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.  If the decline in the market value of a security is determined to be other than temporary we would recognize the decline as a realized loss on the income statement.

During 2008, the Company recognized $882,000 in impairment charges on certain mutual funds compared to an $860,000 impairment in 2007.  The Company attributes the lower valuations of these mutual funds to a significant widening of spreads primarily due to the mortgage-related securities underlying these funds.  This spread differential is primarily due to the general lack of investor interest for these type of securities in the current market environment.  On August 20, 2008, subsequent to recording impairment charges, the Company sold these mutual funds to Alliance Mutual Holding Company at fair value.

Compression of Our Net Interest Spread and Net Interest Margin.  Our average interest rate spread was 2.32% and 2.09% for the years ended December 31, 2008 and 2007, respectively.  Alliance Bank’s net interest margin, which is net interest income as a percentage of average interest-earning assets, was 2.72% and 2.60% for the years ended December 31, 2008 and 2007, respectively.  During 2008, the Federal Reserve Board reduced the federal funds rate seven times from 4.25% at December 31, 2007 to a range of 0% to 0.25% at December 31, 2008.  The Company anticipates that this decrease will cause downward pressure on short term market interest rates.  Generally, a decreasing interest rate environment will reduce interest income earned on interest-earning assets and cause downward pressure on rates paid for interest bearing deposits.  However, interest rate changes generally affect

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interest income on prime based loans and overnight deposits almost immediately, while the impact on interest expense on customer deposits is more gradual due to fixed term certificates of deposit and the highly competitive environment in which the Company operates.  The Company anticipates that the current falling rate environment will continue to put downward pressure on short term interest rates.   This decreasing interest rate environment has resulted in pricing pressure on the Bank’s deposit 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 the years ended December 31, 2008 and 2007, respectively.  The increase was primarily due to a $219,000 or 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 and employee benefits was attributed to a higher level of staff members and annual increases in employees’ salaries.   The increase in advertising and marketing was attributed to the Company’s focus on cable television, media and newspaper advertising to increase the Bank’s visibility.

Critical Accounting Policies

In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies used in preparing our consolidated financial statements included elsewhere herein.  These policies are described in Note 2 of the notes to our consolidated financial statements.  The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry.  Accordingly, the consolidated financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available.  These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented.  The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported consolidated financial results.  These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.

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

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

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

In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results, recent cumulative losses and our forecast of future taxable income.  In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.  These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use

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to manage our business.  Any reduction in estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets.  An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

Other than Temporary Impairment of Securities.  The Company is required to perform periodic reviews of individual securities in its investment portfolio to determine whether a decline in the fair value of a security is other than temporary.  A review of other-than-temporary impairment requires the Company to make certain judgments regarding the nature of the decline, its effect on the financial statements and the probability, extent and timing of a valuation recovery and the Company’s intent and ability to hold the security.  Management evaluates securities for other than temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluations.  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 Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.  If the decline in the market value of a security is determined to be other than temporary we would recognize the decline 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 to a $13.8 million or 32.7% decrease in cash and cash equivalents, a $7.8 million or 17.1% decrease in investment securities available for sale, and a $3.7 million or 10.4% decrease in mortgage backed securities.  These decreases were offset by a $21.5 million 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 was due to the funding of new loans as well as the increase in investment securities held to maturity.  The decrease in investment securities available for sale was primarily due to sales, calls and maturities within the portfolio and the Bank not reinvesting in these instruments at the same levels of the calls and maturities.  The decrease in mortgage backed securities was due to principal repayments which exceeded new purchases.  The proceeds from these principal repayments on mortgage-backed securities as well as calls and maturities on investment securities available for sale were used to fund loan growth.  New loan production amounted to $75.1 million for 2008 and included $29.1 million in residential and consumer lending, $28.6 million in commercial and business lending and $17.4 million in real estate construction lending. In addition, the Bank generally sells all fixed-rate residential loan originations, including servicing, with terms of 15 years or more in the secondary market. Such loans sold amounted to $1.4 million in 2008.  The Bank’s net loans receivable outstanding at December 31, 2008 grew $21.5 million or 8.4% to $278.4 million as compared to $256.9 million at December 31, 2007.  The Bank remains committed to continuing its lending emphasis on developing and growing new and existing relationships with both 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 to an increase of $4.1 million or 1.3% in interest bearing deposits.  The increase was partially offset by a $3.2 million or 19.2% decrease in non interest-bearing deposits.  Stockholders’ equity decreased $2.6 million or 5.0% to $48.9 million as of December 31, 2008 compared to $51.5 million at December 31, 2007.  Beginning January 31, 2008, the Company commenced a stock repurchase program and has repurchased 267,324 shares of common stock at an average price of $8.93 per share, which decreased stockholders’ equity by $2.4 million.

The Bank’s nonperforming assets, which consist of nonaccruing loans, accruing loans 90 days or more delinquent and other real estate 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 $7.0 million of nonperforming assets consisted of $1.8 million of accruing loans 90 days or more delinquent, $5.2 million of nonaccrual loans and no OREO.  At December 31, 2008, nonperforming loans consisted of $2.5 million in single-family residential real estate loans, $3.6 million in commercial real estate loans, $896,000 in real estate construction loans, and $75,000 in consumer and other loans.  The Bank’s management continues to aggressively pursue the collection and resolution of all delinquent loans.  At December 31, 2007, nonperforming loans 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 other loans.  The Bank’s management continues to aggressively pursue the collection and resolution of all delinquent loans.

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

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In addition, in 2008, the Bank’s net charge-offs amounted to $247,000.  At December 31, 2008, the Bank’s allowance for loan losses amounted to 45.3% of total nonperforming 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 losses to total nonperforming loans was due to our analysis of the underlying real estate collateral securing these loans which warranted little in additional reserves in most cases.

Although management uses the best information available to make determinations with respect to the provisions for loan losses, additional provisions for loan losses may be required to be established in the future should economic or other conditions change substantially.  In addition, the Pennsylvania Department of Banking 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 to recognize additions to such allowance based on their judgments about information available to them at the time of their examination.

Results of Operations

General.  The Bank recorded net income of $605,000 for the year ended December 31, 2008 as compared to net income of $1.1 million in 2007.  Net interest income increased $500,000 for the year ended December 31, 2008, compared to 2007, primarily due to a $2.3 million decrease in interest expense as a result of decreasing interest rates paid on deposits during 2008. During 2008, the Federal Reserve Board 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% for the 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 is primarily due to increases in salaries and employee benefits expense and an increase in advertising and marketing when comparing 2008 to 2007.  The increase in salaries and employee benefits was attributed to a higher level of staff members and annual increases in employees’ salaries.  The increase in advertising and marketing was attributed to the Company’s focus on cable television, media and newspaper advertising to increase the Banks visibility. The provision for loan losses increased $465,000 primarily due to increases in loans receivable and nonperforming loans.  For 2008, the Company recorded a $411,000 income tax benefit compared to a $157,000 tax benefit for 2007.  The income tax benefit 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 Yields Earned and Rates Paid.  The following average balance sheet table sets forth for the periods indicated, information on the Bank regarding:  (i) the total dollar amounts of interest income on interest-earning assets and the resulting average yields; (ii) the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs; (iii) net interest income; (iv) interest rate spread; (v) net interest-earning assets (interest-bearing liabilities); (vi) the net yield earned on interest-earning assets; and (vii) the ratio of total interest-earning assets to total interest-bearing liabilities.  Information is based on average daily balances 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	%

(1)Includes loans held for sale.

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

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

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

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Rate/Volume analysis.  The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected the Bank’s interest income and expense during the periods indicated.  For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior year rate), (ii) changes in rate (change in rate multiplied by prior year volume), and (iii) total change in rate and volume.  The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change 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’s interest rate spread (i.e., the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities.  Net interest income increased $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 rates paid on interest bearing deposits and an increase in interest income on loans, partially offset by a decrease in the interest income on investment securities and a decrease in the interest income on balances from depository institutions.

Interest and Dividend Income.  Interest income decreased $1.8 million or 7.4% to $22.5 million for the year ended December 31, 2008, compared to the same period in 2007.  The decrease was primarily due to a $1.5 million or 68.0% decrease in interest income on balances due from depository institutions, a $481,000 or 14.4% decrease in interest income on investment securities, and a $323,000 or 17.7% decrease in interest income earned on mortgage backed securities.  These decreases were offset by a $519,000 or 3.1% increase in interest income earned on loans.  The decrease in interest due from depository institutions was due to a $10.2 million or 22.0% decrease in the average balance of 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 yield earned on balances due from depository institutions.  The decrease in interest income on investment securities was due to a $5.4 million or 8.3% decrease in average balance of investment securities and a 34 or 6.6% basis point decrease in the average yield earned on investment securities.  The decrease in interest income on mortgage backed securities was primarily due to a $7.1 million or 18.0% decrease in the average balance of mortgage backed securities, partially offset by a 1 or 0.2% basis point increase in the average yield earned on mortgage backed securities.  The increase in interest income on loans was primarily due to a $24.7 million or 10.0% increase in the average balance of loans outstanding, partially offset by a 43 or 6.3% basis point decrease in the average yield earned on loans.

Interest Expense.  Interest expense decreased $2.3 million or 16.4% to $11.7 million for the year ended December 31, 2008, compared to the same period in 2007.  This decrease was primarily due to a decrease of $2.3 million or

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

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

Other Income.  Total other income decreased $243,000 or 50.2% to $241,000 for the year ended December 31, 2008, compared to the same period in 2007.  This decrease is primarily attributed to a $157,000 loss on sale of securities from the sale of approximately $15.8 million of certain mutual funds.  During 2008, the Company recognized $882,000 in impairment charges on these mutual funds compared to an $860,000 impairment in 2007.  The Company attributes the lower valuations of these mutual funds to a significant widening of spreads primarily due to the mortgage-related securities underlying these funds.  This spread differential is primarily due to the general lack of investor interest for these type of securities in the current market environment.  In 2007, the Bank recognized a gain on sale of other real estate owned of $21,000 compared to no gain or loss for the comparable period in 2008.  The Bank has collected a management fee from Alliance Mutual Holding Company which reimburses the Bank for certain salary and 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 $10.3 million and $9.8 million for the years ended December 31, 2008 and 2007, respectively.  The increase in 2008 was primarily due to a $219,000 or 4.0% increase in salary and employee benefits and a $145,000 or 45.6% increase in advertising and marking expenses.  The increase in salaries and employee benefits was attributed to a higher level of staff members and annual increases in employees’ salaries.   The increase in advertising and marketing was attributed to the Company’s focus on cable television, 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 the year ended December 31, 2008 was primarily due to lower pre-tax income in 2008 compared to 2007 and by higher tax-exempt income from securities when compared to 2007.  The negative effective tax rates primarily resulted from tax exempt income from Bank-owned life insurance and certain tax-exempt securities purchased by the Bank.

Liquidity and Capital Resources

The Bank’s liquidity, represented by cash and cash equivalents, is a product of its cash flows from operations.  The Bank’s primary sources of funds are deposits, borrowings, amortization, prepayments and maturities of outstanding loans and mortgage-backed securities, sales of loans, maturities and calls of investment securities and other short-term investments and income from operations.  Changes in the cash flows of these instruments are greatly influenced by economic conditions and competition.  After the completion of its reorganization and stock offering in January of 2007, the Bank’s liquidity and capital position were further strengthened resulting from $16.5 million in net proceeds from the stock offering.  The Bank attempts to balance supply and demand by managing the pricing of its loan and deposit products while maintaining a level of growth consistent with the conservative operating philosophy of the management and board of directors.  Any excess funds are invested in overnight and other short-term interest-earning accounts.  The Bank generates cash flow through the retail deposit market, its traditional funding source, for use in investing activities.  In addition, the Bank may utilize borrowings such as Federal Home Loan Bank advances for liquidity or profit enhancement.  At December 31, 2008, the Bank had $37.0 million of outstanding advances and $147.7 million of additional borrowing capacity from the FHLB of Pittsburgh.  The Bank is reviewing its continued utilization of advances from the FHLB as a source of funding based upon recent decisions by the FHLB to suspend the dividend on, and restrict the repurchase of, FHLB stock.  FHLB stock is required to be held when advances from the FHLB are taken.  Further, the Bank has access to the Federal Reserve 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 and investment commitments, to pay maturing savings certificates and savings withdrawals and expenses related to general operations of the Bank.  At December 31, 2008, the total approved loan commitments outstanding amounted to $6.4 million.  At the same date, commitments under unused lines 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.  Management believes that a significant portion of maturing deposits will remain with the Bank.  Investment and mortgage-backed securities totaled $94.0 million at December 31, 2008, of which $7.9 million are scheduled to mature or reprice in one year or less.  The Bank anticipates that it will continue to have sufficient cash flows to meet its current and future commitments.

Bank Regulatory Capital Requirements

The following table summarizes the Bank’s total stockholder’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 2 capital consists entirely of the allowable portion of the allowance for loan losses, which is limited to 1.25% of total risk-weighted assets as detailed under regulations of the FDIC.

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

Recent Accounting Pronouncements

FASB statement No. 141 (R) “Business Combinations” was issued in December of 2007. This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. This new pronouncement will impact the Company’s accounting for any business combinations after December 31, 2008.

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

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at each subsequent reporting 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 on the Company’s consolidated financial position or results of operations.

In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”.  This FSP amends SFAS 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan.  The disclosures about plan assets required by this FSP shall be provided for fiscal years ending after December 15, 2009.  The Company is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.

Impact of Inflation and Changing Prices

The consolidated financial statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation.  Unlike most industrial companies, virtually all of the Bank’s assets and liabilities are monetary in nature.  As a result, interest rates generally have a more significant impact on a financial institution’s performance than does the effect of inflation.

Forward-Looking Statements

This Report contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management.  In addition, in those 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 to identify forward-looking statements.  Such statements reflect the current views of the Company with respect to future looking events and are subject to certain risks, uncertainties and assumptions.  Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended.  The Company does not intend to update these forward-looking statements.

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Item 8.  Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and
Stockholders of Alliance Bancorp, Inc. of Pennsylvania

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

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position 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 the years then ended in conformity with accounting principles generally accepted in the 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 FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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

This annual report does not include an attestation report of the company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

46

Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

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.

47

Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

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.

48

Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

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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Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

Consolidated Statements 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 notes to consolidated financial statements.

50

Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

Notes to Consolidated Financial Statements

1.    Organizational Structure and Nature of Operations

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

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

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

Alliance Bancorp filed a registration statement with the Securities and Exchange Commission with respect to the stock offering. Proxy and offering materials setting forth detailed information relating to the Reorganization Plan and Stock Plan were sent to shareholders of the Bank for their consideration and approval. Shareholders of the Bank approved the Reorganization Plan at a special meeting of shareholders held on December 15, 2006.  The reorganization and stock offering were completed on January 30, 2007.  In the offering, Alliance Bancorp sold 1,807,339 shares of common stock at a purchase price of $10.00 per share and realized $16.5 million in net offering proceeds.  In addition, Alliance Bancorp issued 5,417,661 shares of common stock in exchange for former outstanding shares of the Bank.  Each share of the Bank’s common stock was converted into 2.09945 of common stock shares of Alliance Bancorp.  Lastly, an Employee Stock Ownership Program (ESOP) was established and the Bank borrowed $903,330 from Alliance Bancorp to purchase 90,333 shares of common stock.  Principal and interest payments of the loan will be made quarterly over a term of 8 years at an interest rate of 8.25%.

Nature of Operations — The Bank is principally in the business of attracting deposits through its branch offices and investing those deposits together with funds from borrowings and operations in single-family residential, 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 of Thrift Supervision.

2.    Summary of Significant Accounting Policies

Basis of Presentation and Consolidation - The consolidated financial statements of the Company include the accounts of the Bank, Alliance Delaware Corporation, which holds and manages certain investment and mortgage-backed securities, and Alliance Financial and Investment Services LLC which participates in commission fees from non-insured alternative investment products, all of which are wholly owned subsidiaries of the Bank. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities.  It also requires the

51

disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the potential impairment of FHLB stock, the valuation of deferred tax assets, liability and expense of employee benefit obligations, and evaluation of investment securities for other than temporary impairment.

Segment Information — The Bank has one reportable segment, “Community Banking.”  All of the Banks activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Bank supports the others.  For example, lending is dependent upon the ability of the Bank to fund itself with deposits and other borrowings and manage interest rate and credit risk.  Accordingly, all significant operating decisions are based upon analysis of the Bank as one segment or unit.

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

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

Investment and Mortgage-Backed Securities - The Bank classifies and accounts for debt and equity securities as follows:

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

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

Purchase premiums and discounts are amortized to income over the life of the related security using the interest method.  The adjusted cost of a specific security sold is the basis for determining the gain or loss on the sale.

The following table shows the fair value and unrealized losses on investments, aggregated by investment category and the length of time that individual securities have been continuous 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 movemen t 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’s investment in a $20 million mutual funds portfolio, the Company identified the impairment 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 impairment charges on these securities as a charge against operating results.  In April and July of 2008, the Company sold approximately $15.5 million and $254,000, respectively, of the mutual funds and recorded pretax losses on the sale of securities of $153,000 and $4,000, respectively.  In August of 2008, the remaining $2.7 million of mutual funds were sold at fair value to Alliance Mutual Holding Company.

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

Management evaluates the FHLB stock for impairment in accordance with Statement of Position (SOP) 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others.  Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value.  The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.

Management believes 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. A substantial portion of the loan portfolio is represented by mortgage loans in southeastern Pennsylvania. The ability of the Bank’s debtors to honor their contract is dependent upon real estate and general economic conditions. Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. The Bank 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 the loan using the interest method.

Allowance for Loan Losses - The allowance for loan losses is increased by charges to income and decreased by chargeoffs (net of recoveries).  Allowances are provided for specific loans when 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 collateralizing the loan.  Current and future operating and/or sales conditions are also considered.  These estimates are susceptible to changes that could result in material adjustments to results of operations.  Recovery of the carrying value of such loans is dependent to a great extent on economic, operating and other conditions that may be beyond management’s control.

General loan loss reserves are established as an allowance for losses based on inherent probable risk of loss in the loan portfolio.  In assessing risk, management considers historical experience, volume and composition of lending conducted by the Bank, industry standards, status of nonperforming loans, general economic conditions as they relate to the market area and other factors related to the collectibility of the Bank’s loan portfolio.

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

Accrued Interest Receivable - Interest on loans is recognized as earned.  Accrual of loan interest is discontinued and a reserve established on existing accruals if management believes that after considering collateral value, economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of interest is doubtful.

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

Other Real Estate Owned - Other real estate acquired through, or in lieu of, foreclosure is initially recorded at fair value at the date of acquisition, establishing a new cost basis.  Revenues and expenses from operations are included in other income and other expense.  Additions to the valuation allowance are included in other expense.  Subsequent to foreclosure, valuations are periodically performed by management and an allowance for losses is established, if necessary, by a charge to operations if the carrying value of a property exceeds its estimated fair value less estimated costs to sell.

Bank-Owned Life InsuranceThe Bank is the beneficiary of insurance policies on the lives of officers of the Bank. The Bank has recognized the amount that could be realized under the insurance policies as an asset in the consolidated statements of financial condition.

Premises and Equipment — Land is carried at cost. Premises and equipment are recorded at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the expected useful lives of the related assets which range from two to 40 years.  Amortization of leasehold improvements is computed using the straight-line method over the shorter of the useful lives of the 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.

Income Taxes - Deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities.  The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

54

The Bank has also entered into a tax sharing agreement (under the Internal Revenue Section 1552) with the Company and Alliance Delaware Corporation.  The agreement provides that the tax liability shall be apportioned among the members of the group in accordance with the ratio which that portion of the consolidated taxable income attributed to each member of the group having taxable income bears to the consolidated taxable income.  The Bank had $3,600 and $-0- due to 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 the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Employee Benefit Plans, The Bank’s 401(k) plan allows eligible participants to set aside a certain percentage of their salaries before taxes. The Bank may elect to match employee contributions, as a profit sharing payment, up to a specified percentage of their respective salaries in an amount determined annually by the Board of Directors. The Company’s profit sharing contribution related to the plan resulted in expenses of $100,000 and $108,000 for 2008, and 2007, respectively.

The Bank also maintains a Supplemental Executive and a Retirement Income Plan (the “Plans”). The accrued amount for the Plans included in other liabilities was $3.4 million and $3.0 million at December 31, 2008 and 2007, 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 Bank follows 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 on the weighted-average number of shares outstanding during each period.  Diluted earnings per share is further adjusted for potential common shares that were dilutive and outstanding during the period.  At the present time, the Bank’s capital structure has no potential dilutive securities.

The following table sets forth the composition of the weighted average shares (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

Comprehensive Income — The Bank is required to present, as a component of comprehensive income, the amounts from transactions and other events which currently are excluded from the statement of income and are recorded directly to stockholders’ equity.

Recent Accounting Pronouncements - FASB statement No. 141 (R) “Business Combinations” was issued in December of 2007. This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. This new pronouncement will impact the Company’s accounting for any business combinations after December 31, 2008.

55

In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting 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 on the Company’s consolidated financial position or results of operations.

In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”.  This FSP amends SFAS 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan.  The disclosures about plan assets required by this FSP shall be provided for fiscal years ending after December 15, 2009.  The Company is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.

3.    Investment Securities Available for Sale and Held to Maturity

The amortized cost, gross unrealized gains and losses, and the fair values of investment securities available for sale and held to maturity are shown below.  Where applicable, the maturity distribution and the fair value of investment securities, by contractual maturity, are shown.  Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations 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 in obligations 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 of step-up bonds that provide the U.S. Government agency with the right, but not the obligation, to call the bonds on certain dates.

For the years ended December 31, 2008 and 2007, proceeds from sales of investment securities 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 $8.0 million were pledged as collateral for certain deposits at December 31, 2008 and 2007, respectively.

4.    Mortgage-Backed Securities Available for Sale

The amortized cost, gross unrealized gains and losses, and the fair values of mortgage-backed securities 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, in mortgage-backed securities pledged as collateral for the treasury, tax and loan account and certain deposits.  There were no sales of mortgage-backed securities in 2008 or 2007.

5.    Loans Receivable - Net

Loans receivable consist 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 Bank originates loans to customers located primarily in Southeastern Pennsylvania. This geographic concentration of credit exposes the Bank to a higher degree of risk associated with this economic region. In addition, the Bank participates in the origination and sale of fixed-rate single-family residential mortgage loans in the secondary market. The Bank recognized gains from the sale of such loans of $6,524 and $30,090, for the years ended December 31, 2008 and 2007, respectively.  Servicing was released upon sale.

Following is a summary 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-performing loans amounted to $7.0 million and $2.1 million at December 31, 2008 and 2007, respectively.  Interest income that would have been recorded during 2008 and 2007, if the Bank’s nonperforming loans at the end

58

of the year had been performing in accordance with their terms was $226,000 and $67,000, respectively.  The amount of interest income that was actually recorded during 2008 and 2007 with respect to such nonperforming loans amounted to approximately $121,000 and $47,000, respectively.  Loans 90 days past due and still accruing were $1.8 million and $595,000 at December 31, 2008 and December 31, 2007, respectively.  Non-accrual loans were $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 impairment based 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 executive officers of the Bank and Company.  These loans are made under the same terms and underwriting standards as any other customer.  There were outstanding balances 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 lines of credit issued and $76,000 in principal repayments to directors and executive officers.  At December 31, 2008 there were $2.1 million in unused lines of credit.

6.    Premises and Equipment

Premises and equipment 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

Depreciation expense for the years ended December 31, 2008 and 2007 amounted to approximately $686,000 and $655,000, respectively.

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7.    Deposits

Deposits consist of 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 weighted average cost of interest bearing deposits was 2.97% and 3.45% at December 31, 2008, and 2007, respectively.  Included in non-interest bearing deposits are the deposits of Alliance Mutual Holding Company, a related party, of $2,945,000 and $ 5,712,000 at December 31, 2008 and 2007, respectively.

A summary of certificates 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 of interest 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 were summarized 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 an option, beginning at a predetermined date and quarterly thereafter, to convert certain advances to a floating rate advance, generally at three-month LIBOR. However, the Bank may, at its option and without any penalty, put back the advance or a portion thereof to the FHLB prior to conversion.

The FHLB offers an alternative to regular repurchase agreements.  The term is variable from overnight to one year and utilizes mortgage loans as collateral in lieu of liquidity items such as government securities for collateral.

The Bank’s unused credit line with the FHLB amounted to approximately $20,000,000 at both December 31, 2008 and 2007, respectively.  In addition to the $20,000,000 credit line with the FHLB, the Company has the ability to borrow 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 was 6.30% and 6.30% at December 31, 2008 and 2007, respectively.  The advances are collateralized by FHLB stock owned by the Bank in addition to a blanket pledge of eligible assets in an amount required to be maintained so that the estimated fair value of such eligible assets exceeds, at all times, 110% of the outstanding advances.

The following table sets forth certain information regarding borrowed funds at or for the dates 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 the experience method in computing reserves for bad debts. The bad debt deduction allowable under this method is available to small banks with assets less than $500 million. Generally, this method allows the Bank to deduct an annual addition to the reserve for bad debts equal to the increase in the balance of the Bank’s reserve for bad debts at the end of the year to an amount equal to the percentage of total loans at the end of the year, computed using the ratio of the previous six years’ net chargeoffs divided by the sum of the previous six years’ total outstanding loans at year end.

Retained earnings at both December 31, 2008 and 2007 included approximately $7.1 million, representing bad debt deductions, for which no deferred income taxes have been provided.

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

The Company has no liability recorded related to unrecognized tax positions.  No expense has been recorded or accrued for interest or penalties.

The tax effect of temporary differences that give rise to significant portions of the deferred tax 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 carryforwards expiring through 2011.  The Company has recorded a full valuation allowance for these carryforwards as projected State income at the Bank is not anticipated to be sufficient to realize these benefits.

The consolidated benefit 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 federal income tax benefit differs from that computed at the statutory tax rate as follows:

	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 had approximately $6.4 million and $15.0 million in outstanding loan commitments, excluding unused lines of credit and the undisbursed portion of loans in process, at December 31, 2008 and 2007, respectively, which were expected to fund within the next three months.  In addition, the Bank had $1.3 million and $569,000 in standby letters of credit at 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 and underwriting guidelines and the breakdown between fixed-rate and adjustable-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 cash flow, interest rate risk, risk management and other considerations, longer term fixed-rate residential loans are sold in the secondary market.  There were no outstanding commitments to sell loans at December 31, 2008.

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

63

Expenses related to premises and equipment for 2008 and 2007 were $2.0 million and $1.9 million, respectively.  The Bank maintains offices at nine locations, including seven bank offices which it rents under leases expiring over the next 13 years.  The following is a summary of future minimum rental payments required under all operating 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 defined benefit pension plan, a profit-sharing plan and a defined contribution plan under Section 401(k) of the Internal Revenue Code, all of which cover all full-time employees meeting certain eligibility requirements.  The plans may be terminated at any time at the 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 plan was $100,000 and $108,000, in 2008 and 2007, respectively.  There were no employer contributions to the 401(k) plan in 2008 and 2007.

The net pension costs for the years ended December 31, 2008 and 2007 included the following components:

	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 benefit pension 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 under FAS 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 to contribute $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 securities ranging from 55% to 75%, debt securities ranging from 25% to 45% and cash and cash 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 and Death Benefit Agreement (the “Agreement”) with certain officers of the Bank.  The purpose of the Agreement is to provide the officers with supplemental retirement benefits equal to a specified percentage of final composition and a pre-retirement death benefit if the officer does not attain the specific age requirement.   A summary of the reconciliation and disclosure information required under SFAS No. 158 for the Agreement is as follows:

	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 benefit of employees who meet the eligibility requirements as defined in the plan. The ESOP trust purchased 90,333 shares of common stock using proceeds of a loan from the Company. The Bank will make cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make the required loan payments to the Company. The loan bears an interest rate of 8.25% with principal and interest payable quarterly in equal installments over eight years. The loan is secured by the shares of the stock purchased.

As the debt is repaid, shares are released from the collateral and allocated to qualified employees. Accordingly, the shares pledged as collateral are reported as unearned ESOP shares in the Consolidated Statements of Financial Condition. As shares are released from collateral, the Bank reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. The compensation expense 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.          Regulatory Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.  Qualitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier 1 capital (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 is subject.

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

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The Bank’s actual capital 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 capital at December 31, 2008 and 2007 for financial statement purposes differs from Tier 1 capital amounts by $625,000 and $115,000, respectively, representing the exclusion for regulatory purposes of unrealized gains and losses on securities available for sale and $1.6 million and $901,000, respectively, representing the exclusion of amounts in accumulated other comprehensive loss from the application of SFAS No. 158.

13. Related Party Transactions

The Bank maintains a lease agreement with the Holding Company for one of its office locations. The initial lease term expires in September 2015 and the Bank has paid $42,000 each year for the years ended December 31, 2008 and 2007.  In addition, the Bank maintains a management fee agreement with the Holding Company which provides for the sharing of certain company related expenses.  Such expenses include salaries and benefits, insurance expenses, professional fees and directors fees.  The Bank has received management 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 Financial Instruments

Management uses its best judgment in estimating the fair value of the Bank’s financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Bank could have realized in a sales transaction on the dates indicated.  The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements.  SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements.  The Bank adopted SFAS 157 effective for its fiscal year beginning January 1, 2008.

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

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November 15, 2008 and interim periods within those fiscal years.  As such, the Bank only partially adopted the provisions of SFAS 157, and will begin to account and report for non-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 When the Market for that Asset is Not Active (“FSP 157-3”), to clarify the application of the provisions of SFAS 157 in an inactive market and how an entity would determine fair value in an inactive market.  FSP 157-3 is effective immediately and applies to the Bank’s December 31, 2008 consolidated financial statements.  The adoption of SFAS 157 and FSP 157-3 had no impact on the amounts reported in the financial statements.

SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy under SFAS 157 are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

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

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

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2008 are as follows:

Description	Total		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
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	$	—

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2008 are as follows:

Description	Total		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
Impaired loans	$	2,588,809	$	—	$	—	$	2,588,809

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the

69

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

Cash and Cash Equivalents (Carried at Cost), The carrying amounts reported in the consolidated statements of financial condition for cash and short-term instruments approximate those assets’ fair values.

Investment and 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 obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.  For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3).  In the absence of such evidence, management’s best estimate is used.  Management’s best estimate consists of both internal and external support on certain Level 3 investments.  Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments.

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

Impaired Loans (Generally Carried at Fair Value), Impaired loans are those that are accounted for under FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan (“SFAS 114”), in which the Bank has measured impairment generally based on the fair value of the loan’s collateral.  Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds.  These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.  The fair value consists of the loan balances of $2,844,244, net of a valuation of $255,435.

FHLB Stock (Carried at Cost), The carrying amount of FHLB stock approximates fair value, and considers the limited marketability of such securities.

Accrued Interest Receivable and Payable (Carried at Cost), The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

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

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

Off-Balance Sheet Financial Instruments (Disclosed at Cost), Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.

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The estimated fair values of the Company’s financial instruments were as follows at December 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) Includes non-interest bearing accounts

15. Condensed Financial Information – Parent Corporation Only

CONDENSED BALANCE 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 Pennsylvania was formed on January 30, 2007.  The condensed financial information for the year ended December 31, 2007 includes 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 and Financial Disclosure.

Not applicable.

Item 9A (T).  Controls and Procedures.

The Company’s management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are designed to ensure that financial information required to be disclosed by the Company in the reports that are filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’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 the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

The report of management’s assessment of internal controls over financial 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 by reference to the Company’s definitive proxy statement for the annual meeting of stock holders to be held April 22, 2009. (“Definitive Proxy Statement”).

Item 11.  Executive Compensation.

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

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

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

Item 13.  Certain Relationships and Related Transactions, and Director Independence.

The information required herein is incorporated by reference to the Definitive Proxy Statement

Item 14.  Principal Accounting Fees and Services.

The information required herein is incorporated by reference to the Definitive Proxy Statement

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PART IV.

Item 15.  Exhibits and Financial Statement Schedules.

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

Report of Independent Registered Public Accounting Firm.

Consolidated Statements of Financial Condition at December 31, 2008 and 2007.

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

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

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

Notes to Consolidated Financial Statements.

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

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

No	Description
3.1	Federal Stock Charter of Alliance Bancorp, Inc. of Pennsylvania*
3.2	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 to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, 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 to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities 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

76

/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

77

Corporate Information

Independent Registered Public Accounting Firm

Beard Miller Company LLP

1200 Atwater Drive, Suite 225

Malvern, PA 19355

Market Makers

FTN Midwest Securities Corp

Sandler O’ Neill & Partners, LP

USB Financial Services, Inc.

Stifel, Nicholas, & Company, Inc.

Securities Counsel

Elias, Matz, Tiernan & Herrick LLP

734 15th Street, NW, 11th Floor

Washington, D.C. 20005

Investor Information

Investors, analysts and others seeking

information may contact:

Kathleen P. Lynch

Corporate Secretary

541 Lawrence Road

Broomall, PA 19008-3599

(610) 353-2900

Transfer Agent

Direct questions regarding dividend checks,

address and name changes or lost certificates to:

Registrar and Transfer Company

10 Commerce Drive

Cranford, NJ 07016

Market Information

Alliance Bancorp Common Stock is traded on the Nasdaq Global Market and quoted under the symbol “ALLB”.  The prices shown below reflect the prices reported by the Nasdaq Stock Market adjusted for the reorganization on January 30, 2007.  The closing price on December 31, 2008 was $7.50 per share.  There were 6,957,676 shares outstanding as of December 31, 2008, comprised of 3,973,750 shares held by Alliance Mutual Holding 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 Purchases of Equity Securities

The following table sets forth information with respect to purchases made by or on behalf of the Company of shares 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)All shares 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, or 10% of the outstanding common stock other than shares owned by Alliance Mutual Holding Company, commencing on January 30, 2008, the one year anniversary of the completion of the mid-tier stock holding company reorganization of Alliance Bank.  The program will expire in twelve months, or on January 30, 2009, and all shares are purchased in the open market or by privately negotiated transactions, as in the opinion of management, market conditions warrant.

On January 29, 2009, the Company announced a program to repurchase up to 292,612 shares, or 10% of the outstanding common stock other than shares owned by Alliance Mutual Holding Company, 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 negotiated transactions, as in the opinion of management, market conditions warrant.

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