Alliance Bancorp Inc Of Pennsylvania 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2010

OR

oTRANSITION 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)

United States	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)

(610) 353-2900

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller Reporting Company x
(Do not check if a smaller reporting company)

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

The number of shares outstanding of Common Stock, par value $0.01 per share, of the Registrant as of November 1, 2010, was 6,676,476.

ALLIANCE BANCORP, INC. OF PENNSYLVANIA

Index

		PAGE
Part I — Financial Information
Item 1.	Financial Statements
	Unaudited Consolidated Statements of Financial Condition as of September 30, 2010 and December 31, 2009	3
	Unaudited Consolidated Statements of Income For the Three and Nine Months Ended September 30, 2010 and 2009	4
	Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2010 and 2009	5
	Unaudited Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2010 and 2009	6
	Notes to Unaudited Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	36
Item 4.	Controls and Procedures	36
Part II — Other Information
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	38
Item 4.	[Removed and Reserved]	38
Item 5.	Other Information	38
Item 6.	Exhibits	38
	Signatures	39

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Part I — Item 1.

Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

Consolidated Statements of Financial Condition (unaudited)

(Dollar amounts in thousands, except per share data)

	September 30,			December 31,
	2010			2009
Assets
Cash and cash due from depository institutions	$	4,502		$	5,710
Interest bearing deposits with depository institutions	51,186			69,226
Total cash and cash equivalents	55,688			74,936
Investment securities available for sale	25,183			28,890
Mortgage-backed securities available for sale	17,804			23,355
Investment securities held to maturity (fair value - 2010, $23,444; 2009, $23,797)	22,530			23,446
Loans receivable - net of allowance for loan losses - 2010, $4,875; 2009, $3,538	285,322			285,008
Accrued interest receivable	1,862			2,045
Premises and equipment — net	2,557			2,531
Other real estate owned	3,122			2,968
Federal Home Loan Bank (FHLB) stock-at cost	2,439			2,439
Bank owned life insurance	11,441			11,185
Deferred tax asset — net	4,943			4,546
Prepaid FDIC premium assessment	1,732			2,034
Prepaid expenses and other assets	1,231			833
Total Assets	$	435,854		$	464,216
Liabilities and Stockholders’ Equity
Liabilities
Non-interest bearing deposits	$	10,197		$	15,506
Interest bearing deposits	363,651			359,748
Total deposits	373,848			375,254
FHLB advances	—			32,000
Other borrowings	7,938			3,090
Accrued expenses and other liabilities	5,594			5,427
Total Liabilities	387,380			415,771
Stockholders’ Equity
Common stock, $.01 par value; shares authorized — 15,000,000; shares issued — 7,225,000, and outstanding - 2010, 6,676,476; 2009, 6,729,676	72			72
Additional paid-in capital	24,015			24,015
Retained earnings - partially restricted	30,075			29,848
Unearned shares held by Employee Stock Ownership Plan (ESOP)	(546		)	(602		)
Accumulated other comprehensive loss	(400		)	(583		)
Treasury stock, at cost: 2010, 548,524 shares; and 2009, 495,324 shares	(4,742		)	(4,305		)
Total Stockholders’ Equity	48,474			48,445
Total Liabilities and Stockholders’ Equity	$	435,854		$	464,216

See notes to unaudited consolidated financial statements.

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Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

Consolidated Statements of Income (unaudited)

(Dollar amounts in thousands, except per share data)

	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2010			2009		2010			2009
Interest and Fee Income
Loans	$	4,261		$	4,252	$	12,736		$	12,782
Mortgage-backed securities	195			290		645			964
Investment securities:
Taxable	173			378		700			1,109
Tax — exempt	248			289		779			890
Balances due from depository institutions	40			56		190			124
Total interest and fee income	4,917			5,265		15,050			15,869
Interest Expense
Deposits	1,294			1,747		4,294			5,545
FHLB advances and other borrowed money	75			543		862			1,728
Total interest expense	1,369			2,290		5,156			7,273
Net Interest Income	3,548			2,975		9,894			8,596
Provision for Loan Losses	750			75		1,920			225
Net Interest Income After Provision for Loan Losses	2,798			2,900		7,974			8,371
Other Income
Service charges on deposit accounts	69			71		218			216
Management fees	84			90		252			270
Other fee income	47			41		135			123
Gain (loss) on sale of OREO	—			21		(21		)	21
Increase in cash surrender value of bank owned life insurance	82			86		256			268
Other income	—			—		—			1
Total other income	282			309		840			899
Other Expenses
Salaries and employee benefits	1,461			1,548		4,510			4,474
Occupancy and equipment	481			430		1,451			1,384
Advertising and marketing	98			71		243			216
Professional fees	335			122		622			399
Deposit insurance premiums	159			155		487			605
Loan and OREO expense	43			30		107			84
Directors’ fees	72			64		212			192
Provision for loss on OREO	—			—		135			—
Other noninterest expense	276			275		832			836
Total other expenses	2,925			2,695		8,599			8,190
Income Before Income Tax (Benefit) Expense	155			514		215			1,080
Income Tax (Benefit) Expense	(54		)	55		(259		)	(4		)
Net Income	$	209		$	459	$	474		$	1,084
Basic Earnings per Share	$	0.03		$	0.07	$	0.07		$	0.16

See notes to unaudited consolidated financial statements.

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Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

Consolidated Statements of Changes in Stockholders Equity (unaudited)

(Dollar amounts in thousands, except per share amounts)

	Common Stock		Additional Paid-in Capital		Retained Earnings — Partially Restricted			Unearned Shares Held by ESOP			Accumulated Other Comprehensive Loss			Treasury Stock			Total Stockholders’ Equity			Comprehensive Income
Balance, January 1, 2009	$	72	$	24,029	$	28,836		$	(722	)	$	(930	)	$	(2,386	)	$	48,899
ESOP shares committed to be released								78									78
Net income					1,084												1,084			$	1,084
Dividends declared ($0.09 per share)					(263		)										(263		)
Acquisition of Treasury Stock (176,000 shares)														(1,470		)	(1,470		)
Other comprehensive income — net of tax expense of $62											121						121			121
Balance, September 30, 2009	$	72	$	24,029	$	29,657		$	(644	)	$	(809	)	$	(3,856	)	$	48,449		$	1,205
Balance, January 1, 2010	$	72	$	24,015	$	29,848		$	(602	)	$	(583	)	$	(4,305	)	$	48,445
ESOP shares committed to be released								56									56
Net income					474												474			$	474
Dividends declared ($0.09 per share)					(247		)										(247		)
Acquisition of Treasury Stock (53,200 shares)														(437		)	(437		)
Other comprehensive income — net of tax expense of $94											183						183			183
Balance, September 30, 2010	$	72	$	24,015	$	30,075		$	(546	)	$	(400	)	$	(4,742	)	$	48,474		$	657

See notes to unaudited consolidated financial statements.

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Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(Dollar amounts in thousands)

	For the Nine Months
	Ended September 30,
	2010			2009
Cash Flow From Operating Activities
Net income	$	474		$	1,084
Adjustments to reconcile net income to cash provided by operating activities:
Provision for:
Loan losses	1,920			225
Depreciation and amortization	382			399
Write down of OREO	135			—
ESOP shares committed to be released	56			78
Deferred tax expense (benefit)	(491		)	(33		)
Loss (gain) on the sale of OREO	21			(21		)
Changes in assets and liabilities which provided (used) cash:
Accrued expenses and other liabilities	168			283
Prepaid expenses and other assets	(96		)	(248		)
Increase in cash surrender value of bank owned life insurance	(256		)	(268		)
Accrued interest receivable	183			(6		)
Net cash provided by operating activities	2,496			1,493
Cash Flow From Investing Activities
Purchase of investment securities-available for sale	(26,000		)	(23,000		)
Purchase of investment securities-held to maturity	(1,015		)	(4,085		)
Loans originated and acquired	(31,680		)	(45,500		)
Proceeds from maturities and calls of investment securities	31,935			31,014
Principal repayments of:
Loans	28,777			40,269
Mortgage-backed securities	5,531			7,023
Purchase of premises and equipment	(408		)	(142		)
Investment in OREO	(193		)	(30		)
Proceeds from the sale of OREO	551			53
Net cash provided by investing activities	7,498			5,602
Cash Flow From Financing Activities
Dividends paid	(247		)	(263		)
(Decrease) increase in deposits	(1,406		)	31,288
Purchase of treasury stock	(437		)	(1,470		)
Repayment of FHLB advances	(32,000		)	(5,000		)
Increase in other borrowings	4,848			1,336
Net cash (used in) provided by financing activities	(29,242		)	25,891
Increase (decrease) in Cash and Cash Equivalents	(19,248		)	32,986
Cash and Cash Equivalents, Beginning of Year	74,936			28,308
Cash and Cash Equivalents, End of Year	$	55,688		$	61,294
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest	$	5,328		$	7,309
Income taxes	$	350		$	100
Supplemental Schedule of Noncash and Financial Investing Activities:
Other real estate acquired in settlement of loans	$	791		$	2,873

See notes to unaudited consolidated financial statements.

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ALLIANCE BANCORP, INC OF PENNSYLVANIA AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(1) Organization and Basis of Presentation

On January 30, 2007, Alliance Bank (the “Bank”) completed its 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.

As a result of the reorganization and offering, Alliance Mutual Holding Company (the “Holding Company”) owned 55% of the outstanding common stock of Alliance Bancorp and minority public stockholders owned the remaining 45% of the outstanding common stock of Alliance Bancorp.  Due to purchases of treasury stock, at September 30, 2010, the Holding Company owns 59.5% of the outstanding common stock of Alliance Bancorp and the minority public shareholders own the remaining 40.5%.  The Holding Company is a federally chartered mutual holding company.  The Holding Company and the Company are subject to regulation and supervision of the Office of Thrift Supervision.

On August 11, 2010, the Company announced that it has adopted a plan of conversion and reorganization (the “Plan”) pursuant to which Alliance Bank will reorganize from the two tier mutual holding company structure to the stock holding company structure and will undertake a “second step” offering of shares of common stock of a new Pennsylvania corporation formed in connection with the conversion.

Alliance Mutual Holding Company (the “MHC”), which owns approximately 59.5% of the outstanding common stock of the Company, will merge with and into the Company as part of the reorganization and its shares in the Company will be extinguished.  The Company will then merge with and into the new Pennsylvania corporation.  The new holding company will offer and sell shares of common stock in an amount representing the percentage ownership interest currently held by the MHC, based on an independent appraisal. The new holding company will offer shares of its common stock for sale to the Bank’s eligible depositors and employee stock ownership plan and to members of the general public in a subscription and community offering in the manner and subject to the priorities set forth in the Plan.  In addition, in connection with the conversion of the MHC, shares of the Company’s common stock held by shareholders other than the MHC will be exchanged for shares of common stock of the new Pennsylvania corporation pursuant to an “exchange ratio” designed to preserve their aggregate percentage ownership interest.  The exchange ratio will be determined based upon the independent appraisal of the new holding company and the results of the offering.

The Plan is subject to approval of the Company’s shareholders (including the approval of a majority of the shares held by persons other than the MHC), the Bank’s depositors and regulatory agencies.

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The costs associated with the stock offering will be deferred and will be deducted from the proceeds upon sale of the stock.  To date, no stock offering expenses have been expensed.  At September 30, 2010, $252,000 of costs have been incurred and deferred.  Total costs at the midpoint are estimated at $2.5 million. If the stock offering is unsuccessful, these costs will be expensed.

The Bank is a community oriented savings bank headquartered in Broomall, Pennsylvania.  The Bank operates a total of nine banking offices located in Delaware and Chester Counties, which are suburbs of Philadelphia.  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 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.

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.

The accompanying unaudited consolidated financial statements of Alliance Bancorp, Inc. of Pennsylvania include the accounts of the Company, the Bank and Alliance Delaware Corporation.  The Bank is a wholly owned subsidiary of the Company and Alliance Delaware Corporation is a wholly owned subsidiary of Alliance Bank.  Intercompany accounts and transactions have been eliminated in consolidation.

Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (US GAAP).  The consolidated statement of financial condition at December 31, 2009, has been derived from audited financial statements but does not include all information and footnotes required by US GAAP for complete financial statements.  In the opinion of management, all adjustments consisting of normal recurring adjustments or accruals, which are necessary for a fair presentation of the consolidated financial statements, have been included.  The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the results which may be expected for the year ending December 31, 2010 or any other period.  All significant intercompany accounts and transactions have been eliminated. For comparative purposes, prior years’ consolidated financial statements have been reclassified, when necessary, to conform to report classifications of the current year. The reclassifications had no effect on net income.  The unaudited consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

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The Company has evaluated events and transactions occurring subsequent to September 30, 2010, for items that should potentially be recognized or disclosed in these financial statements.  The evaluation was conducted through the date these financial statements were issued.

(2) Recent Accounting Pronouncements.

The FASB has issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require:   a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements.  In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures: for purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.  ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early adoption is permitted.  The Company is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.

In April 2010, the FASB issued ASU 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset, which codifies the consensus reached in EITF Issue No. 09-I, “Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset.” The amendments to the Codification provide that modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. ASU 2010-18 does not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40.  ASU 2010-18 is effective prospectively for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. Early application is permitted. Upon initial adoption of ASU 2010-18, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration.  The implementation of this standard is

9

not expected to have an impact on the Company’s consolidated financial position or results of operations.

In July 2010, the FASB issued ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which will help investors assess the credit risk of a company’s receivables portfolio and the adequacy of its allowance for credit losses held against the portfolios by expanding credit risk disclosures.  This ASU requires more information about the credit quality of financing receivables in the disclosures to financial statements, such as aging information and credit quality indicators.  Both new and existing disclosures must be disaggregated by portfolio segment or class.  The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure.  The amendments in this Update apply to all public and nonpublic entities with financing receivables.  Financing receivables include loans and trade accounts receivable.  However, short-term trade accounts receivable, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure amendments.  The effective date of ASU 2010-20 differs for public and nonpublic companies.  For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010.  The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010.  For nonpublic companies, the amendments are effective for annual reporting periods ending on or after December 15, 2011.  The Company is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.

ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, addresses the diversity in practice regarding which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral.  The amendments in this Update specify that certain costs should be capitalized in accordance with the amendments.  The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The amendments in this Update should be applied prospectively upon adoption. Retrospective application to all prior periods presented upon the date of adoption also is permitted, but not required. Early adoption is permitted, but only at the beginning of an entity’s annual reporting period.  The Company is currently evaluating the impact this pronouncement will have in its consolidated financial statements.

(3) 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 $10,500 and $31,500 during both the three and nine months ended September 30, 2010 and September 30, 2009, respectively. In addition, the Bank maintains a management fee agreement with the Holding Company which provides for the sharing of certain public company related expenses.  Such expenses include salaries and benefits, insurance expenses, professional fees and directors’ fees.  The Bank has received management fees amounting to $84,000 and $252,000 for the three and nine months ended September 30, 2010 and $90,000 and $270,000 for the three and nine month periods ended September 30, 2009, respectively.

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(4) Commitments and Contingencies

Standby letters of credit are conditional commitments issued by the Bank to guarantee performance of a customer to a third party.  The amount of credit risk involved in issuing letters of credit in the event of nonperformance by the other party is the contract amount.  The maximum exposure related to these commitments at September 30, 2010 was $829,000 which was secured by real estate, cash, and marketable securities.

(5) Segment Information

The Company has no reportable segments. All of the Bank’s 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.

(6) Dividend Restriction

The Holding Company held 3,973,750 shares, or 59.5%, of the Company’s issued and outstanding common stock, and the minority public shareholders held 40.5% of outstanding stock at September 30, 2010. The Holding Company has filed a notice with the Office of Thrift Supervision (“OTS”) to waive its right to receive cash dividends during the 2010 calendar year. The Company paid cash dividends on February 19, 2010, May 28, 2010, and August 20, 2010 to all public shareholders.

The Holding Company has waived receipt of past dividends paid by the Company. The dividends waived are considered as a restriction on the retained earnings of the Company. As of September 30, 2010 and December 31, 2009, the aggregate retained earnings restricted for cash dividends waived were $2,543,200 and $2,185,563, respectively.

(7) Earnings Per Share

There are no convertible securities which would affect the net income (numerator) in calculating earnings per share.  Basic earnings per share data are based on the weighted-average number of shares outstanding during each period.  The Company’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 Three Months Ended September 30,						For the Nine Months Ended September 30,
	2010			2009			2010			2009
Net Income	$	209,000		$	459,000		$	474,000		$	1,084,000
Weighted average shares outstanding	6,687,128			6,834,719			6,701,679			6,883,588
Average unearned ESOP shares	(55,593		)	(64,541		)	(57,445		)	(67,419		)
Weighted average shares outstanding — basic	6,631,535			6,770,178			6,644,234			6,816,169
Basic earnings per share	$	0.03		$	0.07		$	0.07		$	0.16

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(8) 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 ESOP.  The ESOP purchased 90,333 shares of common stock in the offering completed on January 30, 2007 using the proceeds of a loan from the Company.  The Bank makes quarterly payments of principal and interest over a term of 8 years, which was reduced from the original term of 15 years, at a rate of 8.25% to the Company.  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.  As shares are released from collateral, the Company 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 for the three and nine months ended September 30, 2010 was $19,000 and $56,000, respectively.  The compensation expense for the three and nine months ended September 30, 2009 was $27,000 and $78,000, respectively.  For the three months ended September 30, 2010 shares released for allocation, unreleased shares, and total ESOP shares were 1,852, 54,667, and 90,333, respectively.  For the nine months ended September 30, 2010 shares released for allocation, unreleased shares, and total ESOP shares were 5,556, 54,667, and 90,333, respectively.  For the three months ended September 30, 2009 shares released for allocation, unreleased shares, and total ESOP shares were 2,879, 63,102, and 90,333, respectively.  For the nine months ended September 30, 2009 shares released for allocation, unreleased shares, and total ESOP shares were 8,635, 63,102, and 90,333, respectively.

(9) Retirement Plans

The Bank has a defined benefit pension plan which covers all full-time employees meeting certain eligibility requirements.  As required under FASB ASC Topic 715, Compensation — Retirement Benefits, the net pension costs included the following components:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2010			2009			2010			2009
Net Periodic Benefit Cost
Service Cost	$	73,587		$	73,969		$	220,761		$	221,907
Interest Cost	66,854			61,440			200,562			184,320
Expected Return on Plan Assets	(91,717		)	(57,073		)	(246,984		)	(171,219		)
Amortization of Prior Service Cost	3,171			3,171			9,513			9,513
Amortization of Loss	9,937			26,493			29,811			79,479
Net Periodic Benefit Cost	$	61,832		$	108,000		$	213,663		$	324,000

The Bank has a Nonqualified Retirement and Death Benefit Agreement (the “Agreements”) with certain officers of the Bank.  The purpose of the Agreements is to provide the officers with supplemental retirement benefits equal to a specified percentage of final compensation and a pre-retirement death benefit if the officer does not attain the specific age requirement.  A summary of the interim information required under FASB ASC Topic 715, Compensation — Retirement Benefits, for the Agreements is as follows:

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	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2010		2009		2010		2009
Net Periodic Benefit Cost
Service Cost	$	9,865	$	8,779	$	29,595	$	26,337
Interest Cost	59,123		55,294		177,369		165,882
Amortization of Loss	6,012		7,927		18,036		23,781
Net Periodic Benefit Cost	$	75,000	$	72,000	$	225,000	$	216,000

(10) Fair Value Accounting

FASB ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that prioritizes the inputs to validation 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 fair value hierarchy under FASB ASC Topic 820 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 fair value measurement and unobservable (i.e. support with little or no market value activity).

An asset 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.

The following methods and assumptions were used to estimate the fair value of certain Company assets and liabilities.

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

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includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) would be used to support fair values of certain Level 3 investments.  The Company had no Level 1 or Level 3 securities at September 30, 2010 or December 31, 2009.

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 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, net of any valuation allowance.  At September 30, 2010 and December 31, 2009, the fair value consists of loan balances of $8.6 million and $4.3 million, respectively, net of valuation allowances of $1.5 million and $108 thousand, respectively.

Other Real Estate Owned

OREO assets are adjusted to fair value less estimated selling costs upon transfer of the loans to OREO.  Subsequently, OREO assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral.  These assets are included as Level 3 fair values.

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 Borrowings (Carried at Cost). Fair values of FHLB advances and other borrowings are estimated using discounted cash flow analysis, based on quoted prices for

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new FHLB advances and/or other borrowings with similar credit risk characteristics, terms and remaining maturity.  The 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. 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.

The following table summarizes assets measured at fair value on a recurring basis as of September 30, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

Description	Total		(Level 1)Quoted Prices in Active Markets for Identical Assets		(Level 2)SignificantOtherObservableInputs		(Level 3)SignificantUnobservableInputs
Obligations of FHLB	$	5,087	$	—	$	5,087	$	—
Obligations of Freddie Mac	9,043				9,043
Obligations of Fannie Mae	11,053				11,053
Mortgage-backed securities available for sale	17,804		—		17,804		—
Total	$	42,987	$	—	$	42,987	$	—

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

Description	Total		(Level 1)Quoted Prices in Active Markets for Identical Assets		(Level 2)SignificantOtherObservableInputs		(Level 3)SignificantUnobservableInputs
Obligations of FHLB	$	6,084	$	—	$	6,084	$	—
Obligations of Freddie Mac	1,980				1,980
Obligations of Fannie Mae	20,826				20,826
Mortgage backed securities available for sale	23,355		—		23,355		—
Total	$	52,245	$	—	$	52,245	$	—

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For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2010 are as follows:

Description	Total		(Level 1)Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3)SignificantUnobservable Inputs
Impaired loans	$	8,579	$	—	$	—	$	8,579
Other real estate	3,122		—		—		3,122
Total	$	11,701	$	—	$	—	$	11,701

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

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

The carrying amounts and estimated fair values of the Company’s assets and liabilities are as follows:

	At September 30, 2010				At December 31, 2009
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
	(In thousands)
Assets:
Cash and due from banks	$	4,502	$	4,502	$	5,710	$	5,710
Interest bearing deposits at banks	51,186		51,186		69,226		69,226
Investment securities	47,713		48,627		52,336		52,687
Mortgage-backed securities	17,804		17,804		23,355		23,355
Loans receivable	285,322		284,985		285,008		285,105
FHLB stock	2,439		2,439		2,439		2,439
Accrued interest receivable	1,862		1,862		2,045		2,045
Liabilities:
NOW and MMDA deposits (1)	$	80,603	$	80,603	$	82,779	$	80,779
Other savings deposits	42,607		42,607		40,892		40,892
Certificate accounts	250,639		252,576		251,583		253,534
FHLB advances & other borrowings	7,938		7,938		35,090		32,960
Accrued interest payable	20		20		192		192
Off balance sheet instruments	—		—		—		—

(1) Includes non-interest bearing accounts

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(11) 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.

	At September 30, 2010
	Less than 12 Months				12 Months or Longer				Total
			Gross				Gross				Gross
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in Thousands)
Securities Available for Sale
U.S. Government obligations	$	999	$	1	$	—	$	—	$	999	$	1
Mortgage-backed securities	—		—		163		9		163		9
Total securities available for sale	$	999	$	1	$	163	$	9	$	1,162	$	10
Securities Held to Maturity
Municipal obligations	$	999	$	15	$	426	$	2	$	1,425	$	17

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	At December 31, 2009
	Less than 12 Months				12 Months or Longer				Total
			Gross				Gross				Gross
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in Thousands)
Securities Available for Sale
U.S. Government obligations	$	19,784	$	214	$	—	$	—	$	19,784	$	214
Mortgage-backed securities	—		—		669		15		699		15
Total securities available for sale	$	19,784	$	214	$	669	$	15	$	20,483	$	229
Securities Held to Maturity
Municipal obligations	$	2,060	$	20	$	3,904	$	141	$	5,964	$	161

Other-than-temporary impairment, if any, is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

As of September 30, 2010, management believes that the estimated fair value of the securities disclosed above is primarily dependent upon the movement in market interest rates particularly given the negligible inherent credit risk associated with the issuers of these securities.

Although the fair value will fluctuate as market interest rates move, management believes that these fair values will recover as the underlying portfolios mature due to interest rates. As of September 30, 2010, there were 2 U.S. government obligations in unrealized loss positions for less than twelve months and none in a unrealized loss position greater than twelve months, no mortgage backed securities in a unrealized loss position for less than twelve months and 3 in a unrealized loss position greater than twelve months, and 1 municipal obligation in an unrealized loss position for less than twelve months and 1 in a unrealized loss position greater than twelve months.  The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before recovery. Management does not believe any individual unrealized loss as of September 30, 2010 represents an other-than-temporary impairment.

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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.

	At September 30, 2010
	Amortized		Gross Unrealized					Fair
Dollars in Thousands	Cost		Gains		Losses			Value
Available for Sale:
Obligations of the Federal Home Loan Bank:
Due after 1 year or less	$	1,000	—		—			$	1,000
Due after 1 year through 5 years	2,000		$	5	$	(1	)	2,004
Due after 5 years through 10 years	1,996		87		—			2,083
Total	$	4,996	$	92	$	(1	)	$	5,087

	At September 30, 2010
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
Obligations of Freddie Mac:
Due after 1 year through 5 years	$	2,000	$	7	$	—	$	2,007
Due after 5 years through 10 years	6,994		42		—		7,036
Total	$	8,994	$	49	$	—	$	9,043

	At September 30, 2010
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
Obligations of Fannie Mae:
Due after 1 year through 5 years	$	4,000	$	10	$	—	$	4,010
Due after 5 years through 10 years	5,000		37		—		5,037
Due after 10 years	2,000		6		—		2,006
Total	$	11,000	$	53	$	—	$	11,053

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	At September 30, 2010
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Held to Maturity
Municipal Obligations:
Due after 5 years through 10 years	$	3,757	$	172	$	—		$	3,929
Due after 10 years	18,773		759		(17		)	19,515
Total	$	22,530	$	931	$	(17	)	$	23,444

	At December 31, 2009
	Amortized			Gross Unrealized					Fair
	Cost			Gains		Losses			Value
Available for Sale:
Obligations of the Federal Home Loan Bank:			��
Due 1 year or less	$	1,000		$	5	—			$	1,005
Due after 5 years through 10 years	4,996			100		(17		)	5,079
Total	$	5,996		$	105	$	(17	)	$	6,084

	At December 31, 2009
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Obligations of Freddie Mac:
Due after 1 year through 5 years	$	1,000	$	—	(15		)	$	985
Due after 10 years	1,000		—		(5		)	995
Total	$	2,000	$	—	$	(20	)	$	1,980

	At December 31, 2009
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Obligations of Fannie Mae:
Due after 5 years through 10 years	$	6,000	$	2	$	(41	)	$	5,961
Due after 10 years	14,999		2		(136		)	14,865
Total	$	20,999	$	4	$	(177	)	$	20,826

	At December 31, 2009
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Held to Maturity
Municipal Obligations:
Due after 5 years through 10 years	$	4,316	$	170	—			$	4,486
Due after 10 years	19,130		342		$	(161	)	19,311
Total	$	23,446	$	512	$	(161	)	$	23,797

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Included in obligations of U.S. Government agencies at September 30, 2010 and December 31, 2009, were $23.1 million and $19.8 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. Investment securities with an aggregate carrying value of $3.0 million and $12.0 million were pledged as collateral for certain deposits at September 30, 2010 and December 31, 2009, respectively.  There were no sales of investment securities in 2010 or 2009.

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:

	At September 30, 2010
	Amortized		Gross Unrealized					Fair
Dollars in Thousands	Cost		Gains		Losses			Value
GNMA pass-through certificates	$	1,836	$	90	$	—		$	1,926
FHLMC pass-through certificates	6,099		377		—			6,476
FNMA pass-through certificates	8,998		413		(9		)	9,402
Total	$	16,933	$	880	$	(9	)	$	17,804

	At December 31, 2009
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
GNMA pass-through certificates	$	2,141	$	80	$	—		$	2,221
FHLMC pass-through certificates	8,379		419		—			8,798
FNMA pass-through certificates	11,943		408		(15		)	12,336
Total	$	22,463	$	907	$	(15	)	$	23,355

At September 30, 2010 and December 31, 2009, the Bank had $5.7 million and $3.1 million, respectively, in mortgage-backed securities pledged as collateral for the treasury, tax and loan account and certain deposits.  At September 30, 2010, the Bank had $2.8 million in mortgage-backed securities pledged as collateral against our FHLB open credit line.  There were no sales of mortgage-backed securities in 2010 or 2009.

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(12) Loans Receivable - Net

Loans receivable consist of the following:

	At September 30,			At December 31,
Dollars in Thousands	2010			2009
Real estate loans:
Single-family	$	112,208		$	114,953
Multi-family	1,197			1,231
Commercial	135,739			131,874
Land and construction	26,604			24,581
Commercial business	7,439			8,458
Consumer and other loans	7,313			7,614
Total loans receivable	290,500			288,711
Less:
Deferred fees	(303		)	(165		)
Allowance for loan losses	(4,875		)	(3,538		)
Loans receivable - net	$	285,322		$	285,008

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.

Following is a summary of changes in the allowance for loan losses for the three and nine months ended September 30, 2010 and the year ended December 31, 2009:

Dollars in Thousands	For the three months ended September 30, 2010			For the nine months ended September 30, 2010			For the twelve months ended, December 31, 2009
Balance, beginning of period	$	4,185		$	3,538		$	3,169
Provision charged to operations	750			1,920			528
Charge-offs	(60		)	(583		)	(160		)
Recoveries	—			—			1
Balance, end of period	$	4,875		$	4,875		$	3,538

At September 30, 2010 and December 31, 2009, 100% of impaired loan balances were measured for impairment based on the fair value of the loans’ collateral.

	At September 30,		At December 31,
Dollars in Thousands	2010		2009
Impaired loans without a valuation allowance	$	1,492	$	1,543
Impaired loans with a valuation allowance	10,079		4,435
Total impaired loans	$	11,571	$	5,978
Valuation allowance related to impaired loans	$	1,500	$	108

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(13) Comprehensive Income (Loss)

Total comprehensive income (loss) includes all changes in stockholders’ equity during a period from transactions and other events and circumstances from non-owner sources. The Company’s other comprehensive income (loss) is comprised of unrealized holding gains and losses on securities available-for-sale and the effects of changes in the liability for retirement plans.

The table below provides a reconciliation of the components of other comprehensive income (loss) to the disclosure provided in the statement of changes in stockholders’ equity.

The components of other comprehensive income (loss), net of taxes, were as follows for the following fiscal periods:

				Tax
	Before			Benefit			Net of
(Dollars in Thousands)	Tax			(Expense)			Tax
For the three month period ended September 30, 2010:
Unrealized losses on available for sale securities
Unrealized holding losses arising during period	$	(120	)	$	41		$	(79	)
Change in unrealized loss on available for sale securities	(120		)	41			(79		)
Change in liability in retirement plans	—			—			—
Other comprehensive loss	$	(120	)	$	41		$	(79	)
For the three month period ended September 30, 2009:
Unrealized gains on available for sale securities
Unrealized holding gains arising during period	$	177		$	(60	)	$	117
Change in unrealized gain on available for sale securities	177			(60		)	117
Change in liability in retirement plans	—			—			—
Other comprehensive income	$	177		$	(60	)	$	117

			Tax
	Before		Benefit			Net of
(Dollars in Thousands)	Tax		(Expense)			Tax
For the nine month period ended September 30, 2010:
Unrealized gains on available for sale securities
Unrealized holding gains arising during period	$	277	$	(94	)	$	183
Change in unrealized gain on available for sale securities	277		(94		)	183
Change in liability in retirement plans	—		—			—
Other comprehensive income	$	277	$	(94	)	$	183
For the nine month period ended September 30, 2009:
Unrealized gains on available for sale securities
Unrealized holding gains arising during period	$	183	$	(62	)	$	121
Change in unrealized gain on available for sale securities	183		(62		)	121
Change in liability in retirement plans	—		—			—
Other comprehensive income	$	183	$	(62	)	$	121

The components of accumulated other comprehensive loss, net of income taxes, are as follows:

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(Dollars in Thousands)	September 30, 2010			December 31, 2009
Net unrealized gain on securities	$	702		$	519
Net unrealized loss on retirement plans	(1,102		)	(1,102		)
Total accumulated other comprehensive loss	$	(400	)	$	(583	)

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Part I — Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Alliance Bancorp, Inc. of Pennsylvania (the “Company”) may from time to time make written or oral “forward-looking statements,” including statements contained in the Company’s filings with the Securities and Exchange Commission (including this Quarterly Report on Form 10-Q and the exhibits hereto and thereto), in its reports to shareholders and in other communications by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements with respect to the Company’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Company’s control).  The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements.  The following factors, among others, could cause the Company’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services; the willingness of users to substitute competitors’ products and services for the Company’s products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services’ laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

The Company cautions that the foregoing list of important factors is not exclusive.  Readers are also cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this report.  The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

General

The Company’s profitability is highly dependent on net interest income.  The components that drive net interest income are the amounts of interest-earning assets and interest-bearing liabilities along with rates earned or paid on such rate sensitive instruments.  The Company manages interest rate exposure by attempting to match asset maturities with liability maturities.  In

25

addition to managing interest rate exposure, the Company also considers the credit risk, prepayment risk and extension risk of certain assets.  The Company maintains asset quality by utilizing comprehensive loan underwriting standards and collection efforts as well as originating or purchasing primarily secured or guaranteed assets.

The Company’s profitability is also affected by fee income, gain or loss on the sale of other real estate owned, general and administrative expenses, provisions for loan losses, other real estate owned expenses, and income taxes.

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 more detail in Note 2 of the notes to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2009.  The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America (US GAAP) 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 consolidated 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 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

26

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 Department and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan losses.  The Department 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. Management makes estimates and judgments to calculate various tax liabilities and determine the recoverability of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses.  As of September 30, 2010, the Company carried $645,000 in deferred tax assets from the loss on the sale and impairment charges taken on certain mutual funds.  The Company must generate capital gains within a certain time period to realize the tax benefit from these capital losses.  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, 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 to manage our business.  Any reduction in estimated future taxable income may require us to record a 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 Investment Securities and Mortgage Backed 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 below its amortized cost 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 consolidated financial statements and the probability, extent and timing of a valuation recovery.  Management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether or not we intend to sell or expect that it is more than likely than not that we will be required to sell the security prior to an anticipated recovery of fair value.  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.  The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the

27

total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

Comparison of Financial Condition at September 30, 2010 and December 31, 2009

Total assets decreased $28.4 million or 6.1% to $435.9 million at September 30, 2010 compared to $464.2 million at December 31, 2009.  This decrease was primarily due to a $19.3 million or 25.7% decrease in total cash and cash equivalents, a $5.6 million or 23.8% decrease in mortgage backed securities available for sale, a $3.7 million or 12.8% decrease in investment securities available for sale, and a $916,000 or 3.9% decrease in investment securities held to maturity.

Total liabilities decreased $28.4 million or 6.8% to $387.4 million at September 30, 2010 compared to $415.8 million at December 31, 2009.  This decrease was due to a $32.0 million or 100.0% decrease in FHLB advances and a $1.4 million or 0.4% decrease in total deposits, partially offset by a $4.8 million or 156.9% increase in other borrowed money.

Stockholders’ equity increased $29,000 to $48.5 million as of September 30, 2010 compared to $48.4 million at December 31, 2009. The increase was primarily due to a $183,000 decrease in accumulated other comprehensive loss and a $227,000 increase in retained earnings.  The increase was partially offset by a $437,000 increase in treasury stock.  Beginning in January of 2009, the Company commenced a 292,612 share repurchase program and has repurchased 281,200 shares at an average price of $8.35 per share through September 30, 2010.

Nonperforming assets, which consist of nonaccruing loans, accruing loans 90 days or more delinquent and other real estate owned (OREO) (which includes real estate acquired through, or in lieu of, foreclosure) increased $5.8 million to $16.6 million or 3.81% of total assets at September 30, 2010 from $10.8  million or 2.33% of total assets at December 31, 2009.  This increase was primarily due to the placement of a $6.1 million land and development loan for a mixed use commercial real estate project located in Bradenton, Florida, as nonaccruing at March 31, 2010.  This resulted from a lack of sales activity combined with a decline in the liquidity of the borrowers and their inability to access additional funds.  The borrowers have not made payment as required by an extension and forbearance agreement entered into in June 2010.  Given the borrower’s failure to make the scheduled payment in the quarter ended September 30, 2010, as required by the extension and forbearance agreement, and the inability of the borrower to enter into agreements with potential buyers of any of the collateral parcels securing the loan, the Company’s considering all of its options with respect to this loan, including the possibility of foreclosure.  At September 30, 2010, the $16.6 million of nonperforming assets consisted of $1.8 million of accruing loans 90 days or more delinquent, $11.6 million of nonaccrual loans, and $3.1 million in OREO.  At September 30, 2010, the $11.6 million of nonaccrual loans consisted of one single family real estate loan in the amount of $75,000, ten commercial real estate loans totaling $1.6 million, two real estate construction loans totaling $9.9 million, and one commercial business loan in the amount of $74,000.  The amount of specific reserves related to nonaccrual loans was $1.5 million as of September 30, 2010.  Management continues to aggressively pursue the collection and resolution of all delinquent loans.

At September 30, 2010 and December 31, 2009, the allowance for loan losses amounted to $4.9

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million and $3.5 million, respectively.  At September 30, 2010, the allowance for loan losses amounted to 36.2% of nonperforming loans and 1.68% of total loans receivable, as compared to 45.1% and 1.23%, respectively, at December 31, 2009.  The decrease in the allowance for loan losses to total nonperforming loans was primarily due to our analysis of the underlying real estate collateral securing these loans.

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 Department 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.

Comparison of Results of Operations for the Three and Nine Months ended September 30, 2010 and September 30, 2009

General.  Net income decreased $250,000 or 54.4% to $209,000 or $0.03 per share for the three months ended September 30, 2010 as compared to $459,000 or $0.07 per share for the same period in 2009.  The decrease in net income was primarily due to a $675,000 or 900.0% increase in provision for loan losses for the three months ended September 30, 2010 compared to the three months ended September 30, 2009.  The increase in the provision for loan losses was primarily due to the need for additional specific allowances that resulted from our quarterly valuation analysis for problem loans and charge-offs of $60,000.

Net income decreased $610,000 or 56.3% to $474,000 or $0.07 per share for the nine months ended September 30, 2010 as compared to $1.1 million or $0.16 per share for the same period in 2009.  The decrease in net income was primarily due to a $1.7 million or 753.3% increase in provision for loan losses for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009.  Also contributing to the decrease in net income was the $135,000 provision for loss on OREO.  The increase in the provision for loan losses was primarily due to the need for additional reserves that resulted from our quarterly valuation analysis for problem loans and, charge-offs of $582,000.  The provision for loss on OREO was primarily due to the need for additional write-downs that resulted from our quarterly valuation analysis of our OREO.

Net Interest Income.  Net interest income is determined by the 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 $573,000 or 19.3% during the three months ended September 30, 2010 as compared to the same period in 2009.  The increase in net interest income was due to a $921,000 or 40.2% decrease on interest expense in interest bearing liabilities, primarily the result of a $453,000 or 25.9% decrease in interest expense on interest bearing deposits as well as a $468,000 or 86.2% decrease on interest expense on FHLB advances and other borrowed money.  The reduction in interest expense in the three months ended September 30, 2010, was due primarily to lower average costs on interest bearing liabilities, primarily as a result of the continuing low interest rate environment.  The decrease in interest

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expense more than offset a $348,000 or 6.6% decrease in interest income for the three month period ended September 30, 2010 compared to the same period in 2009.

Net interest income increased $1.3 million or 15.1% during the nine months ended September 30, 2010 as compared to the same period in 2009.  The improvement in net interest income during the nine months ended September 30, 2010 was again due primarily to the effects of the current low market rates of interest, which has reduced our cost of funds.  The increase in net interest income was due to a $2.1 million or 29.1% decrease in interest expense on interest bearing liabilities, primarily the result of a $1.3 million or 22.6% decrease in the interest expense on interest bearing deposits as well as an $866,000 or 50.1% decrease on interest expense on FHLB advances and other borrowed money.  This decrease more than offset an $819,000 or 5.2% decrease in interest income during the nine months ended September 30, 2010 compared to the same period in 2009.  Based on the current economic environment and market competition, management anticipates continued pressure on the interest rate spread for 2010 which may negatively impact net interest income.

Interest Income.  Interest income decreased $348,000 or 6.6% to $4.9 million for the three months ended September 30, 2010, compared to the same period in 2009.  The decrease was due to a $246,000 or 36.9% decrease in interest income on investment securities,  a $95,000 or 32.8% decrease in interest income on mortgage backed securities, and a $16,000 or 28.6% decrease in interest earned on balances due from depository institutions.  These decreases were partially offset by a $9,000 increase on interest income earned on loans.  The decrease in interest income on investment securities was due to a $9.7 million or 16.3% decrease in the average balance of investment securities and a 109 basis point or 24.5% decrease in the average yield earned.  The decrease in interest income on mortgage backed securities was due to an $7.8 million or 29.2% decrease in the average balance of mortgage backed securities and a 22 basis point or 5.1% decrease in the average yield earned.  The decrease in interest income on balances due from depository institutions was due to a 20 basis point or 42.0% decrease in the average yield earned, partially offset by $10.7 million or 22.9% increase in the average balance of balances due from depository institutions.  The increase in interest income on loans was due to a $3.2 million or 1.1% increase in the average balance of loans outstanding, partially offset by a 5 basis point or 0.9% decrease in the average yield earned.

Interest income decreased $819,000 or 5.2% to $15.1 million for the nine months ended September 30, 2010, compared to the same period in 2009.  The decrease was due to a $520,000 or 26.0% decrease in interest income on investment securities, a $319,000 or 33.1% decrease in interest income on mortgage backed securities, and a $46,000 or 0.4% decrease in interest income on loans.  These decreases were partially offset by a $66,000 or 53.2% increase in interest income earned on balances due from depository institutions.  The decrease in interest income on investment securities was due to a $5.6 million or 9.7% decrease in the average balance of investment securities and an 84 basis point or 18.2% decrease in the average yield earned.  The decrease in interest income on mortgage backed securities was due to an $8.1 million or 28.1% decrease in the average balance of mortgage backed securities and a 31 basis point or 7.0% decrease in the average yield earned.  The decrease in interest income on loans was due to a 12 basis point or 2.0% decrease in the average yield earned on loans, partially offset by a $4.9 million or 1.7% increase in the average balance of loans.  The increase in interest income on balances due from depository institutions was due to a $31.8 million or 85.3%

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increase in the average balance of balances due from depository institutions, partially offset by a 7 basis point or 15.9% decrease in the average yield earned.

Interest Expense.  Interest expense decreased $921,000 or 40.2% to $1.4 million for the three months ended September 30, 2010, compared to the same period in 2009.  This decrease in interest expense was primarily the result of a $453,000 or 25.9% decrease in the interest expense on interest bearing deposits as well as a $468,000 or 86.2% decrease on interest expense on FHLB advances and other borrowings.  The decrease in interest expense on interest bearing deposits was the result of a 64 basis point or 31.1% decrease on rates paid on interest bearing deposits which was partially offset by a $24.8 million or 7.3% increase in the average balance of interest bearing deposits.  The decrease in interest expense on FHLB advances and other borrowings was the result of a $23.8 million or 65.5% decrease in the average balance of advances and other borrowings and a 359 basis point or 59.9% decrease in the cost of funds on FHLB advances and other borrowings.

Interest expense decreased $2.1 million or 29.1% to $5.2 million for the nine months ended September 30, 2010, compared to the same period in 2009.  This decrease in interest expense was primarily the result of a $1.3 million or 22.6% decrease in interest expense on interest bearing deposits and an $866,000 or 50.1% decrease on interest expense on FHLB advances and other borrowings.  The decrease in interest expense on interest bearing deposits was the result of a 72 basis point or 31.7% decrease on rates paid on interest bearing deposits, which was partially offset by a $43.2 million or 13.3% increase in the average balance of interest bearing deposits.  The decrease in interest expense on FHLB advances and other borrowed money was the result of a $17.8 million or 45.9% decrease in the average balance of FHLB advances and other borrowings and a 46 basis point or 7.8% decrease in the cost of fundson FHLB advances and other borrowings.

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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 Company 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.

Average Balance Sheet

Three Months Ended September 30,

	2010						2009
	Average						Average
(Dollars in Thousands)	Balance		Interest		Rate		Balance		Interest		Rate
Interest-earning assets:
Loans receivable (1) (2) (3)	$	288,609	$	4,261	5.91	%	$	285,373	$	4,252	5.96	%
Mortgage-backed securities (2) (3)	18,838		195		4.14		26,597		290		4.36
Investment securities (3)	50,168		421		3.36		59,910		667		4.45
Other interest-earning assets	57,342		40		0.28		46,675		56		0.48
Total interest-earning assets	414,957		4,917		4.74		418,555		5,265		5.03
Noninterest-earning assets	27,624						27,534
Total assets	$	442,581					$	446,089
Interest-bearing liabilities:
Deposits	$	363,679	1,294		1.42		$	338,899	1,747		2.06
FHLB advances and other borrowings	12,500		75		2.40		36,274		543		5.99
Total interest-bearing liabilities	376,179		1,369		1.46		375,173		2,290		2.44
Noninterest-bearing Liabilities	17,560						22,212
Total liabilities	393,739						397,385
Stockholders’ equity	48,842						48,704
Total liabilities and stockholders’ equity	$	442,581					$	446,089
Net interest-earning assets	$	38,778					$	43,382
Net interest income/interest rate spread			$	3,548	3.28	%			$	2,975	2.59	%
Net yield on interest- earning assets (3)					3.42	%					2.84	%

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

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

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

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Average Balance Sheet

Nine Months Ended September 30,

	2010						2009
	Average						Average
(Dollars in Thousands)	Balance		Interest		Rate		Balance		Interest		Rate
Interest-earning assets:
Loans receivable (1) (2) (3)	$	288,538	$	12,736	5.89	%	$	283,685	$	12,782	6.01	%
Mortgage-backed securities (2)	20,785		645		4.14		28,899		964		4.45
Investment securities (3)	52,253		1,479		3.77		57,843		1,999		4.61
Other interest-earning assets	69,074		190		0.37		37,279		124		0.44
Total interest-earning assets	430,650		15,050		4.66		407,706		15,869		5.19
Noninterest-earning assets	28,214						26,570
Total assets	$	458,864					$	434,276
Interest-bearing liabilities:
Deposits	$	368,334	4,294		1.55		$	325,177	5,545		2.27
FHLB advances and other borrowings	21,028		862		5.47		38,843		1,728		5.93
Total interest-bearing liabilities	389,362		5,156		1.77		364,020		7,273		2.66
Noninterest-bearing Liabilities	20,653						21,374
Total liabilities	410,015						385,394
Stockholders’ equity	48,849						48,882
Total liabilities and stockholders’ equity	$	458,864					$	434,276
Net interest-earning assets	$	41,288					$	43,686
Net interest income/interest rate spread			$	9,894	2.89	%			$	8,596	2.53	%
Net yield on interest- earning assets (3)					3.06	%					2.81	%

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

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

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

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Provision for Loan Losses.The provision for loan losses amounted to $750,000 and $75,000 for the three months ended September 30, 2010 and 2009, respectively.  The provision for loan losses amounted to $1.9 million and $225,000 for the nine months ended September 30, 2010 and 2009, respectively.

The $675,000 and $1.7 million increase in the provision for loan losses in the three and nine months ended September 30, 2010, respectively,  compared to the same periods in 2009 reflects, among other factors, the $350,000 increase in non-performing loans in the third quarter of 2010 and $60,000 in charge-offs to the allowance for loan losses during the quarter in addition to a provision covering a modest increase in the amount of our outstanding commercial real estate loans and construction loans.  Also in the quarter ended September 30, 2010, we increased our provision for losses for amounts allocated to our $6.1 million participation interest in an acquisition and development loan located in Bradenton, Florida by $300,000 primarily as a result of the borrowers’ failure to make a scheduled payment to cover future interest and real estate taxes, as required by an extension and forbearance agreement entered into in June 2010.  In addition, real estate sales activity in the Florida market area in which this property is located continues to be slow.  This loan was placed on non-accrual status in March 2010. Given the borrower’s failure to make the scheduled payment in the quarter ended September 30, 2010, as required by the extension and forbearance agreement, and the inability of the borrower to enter into agreements with potential buyers of any of the collateral parcels securing the loan, the Company’s considering all of its options with respect to this loan, including the possibility of foreclosure.  No assurance can be given that the Company may not be required to recognize additional provisions for loan losses and/or charge-offs with respect to this loan.  Our provision for loan losses for the quarter ended September 30, 2010 also includes $276,000 allocated to our participation interests, which had an aggregate outstanding balance of $2.9 million at September 30, 2010, in two loans for the renovation and conversion of an eight-story condominium building with 132 residential units and one commercial unit located in Center City, Philadelphia.  While these loans are performing and the borrower has continued to make all scheduled payments, current cash flow from the project does not cover the loan payments and sales activity has not met projections.  The cash shortfall is being supplemented by a cash collateral account held by the lead lender and other cash from the borrowers.  In addition, the lead lender recently obtained an updated appraisal which reflected a reduction in the appraised value of the condominium project and the other collateral securing these loans.

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 our allowance for 36 loan losses. Such agencies may require us to recognize additions to such allowance based on their judgments about information available to them at the time of their examination.

Other Income. Other income was $282,000 for the three months ended September 30, 2010 compared to $309,000 for the same period in 2009. The $27,000 or 8.7% decrease in other income included a $6,000 or 6.7% decrease in management fees, a $4,000 or 4.7% decrease in the cash surrender value of bank owned life insurance, and a $21,000 prior period gain on the

34

sale of OREO.  Other income was $840,000 for the nine months ended September 30, 2010 compared to $899,000 for the same period in 2009. The $59,000 or 6.6% decrease was primarily the result of a $21,000 loss on the sale of OREO which was recorded as a reduction of other income in the first quarter of 2010 compared to a $21,000 gain in the nine months ended September 30, 2009. The decrease in other income also included an $18,000 or 6.7% decrease in management fees, and a $12,000 or 4.5% decrease in the cash surrender value of bank owned life insurance, partially offset by a $12,000 or 9.8% increase in other fee income.

Other Expenses.Other expenses increased $230,000 or 8.5% to $2.9 million for the three months ended September 30, 2010 compared to the same period in 2009. The increase was primarily due to a $213,000 or 174.4% increase in professional fees that resulted from litigation expense related to the protection of the Company’s Customer First trademark.  In addition, other expenses increased in the third quarter of 2010 due to a $51,000 or 11.9% increase in expenses related to occupancy and equipment, a $13,000 or 43.3% increase in loan and OREO expense, and a $27,000 or 37.5% increase in advertising and marketing expense. Salaries and employee benefits expense were reduced by $87,000 or 5.6% in the three months ended September 30, 2010 compared to the same period in 2009.  Other expenses increased $409,000 or 5.0% to $8.6 million for the nine months ended September 30, 2010 compared to the same period in 2009. The increase was primarily due to a $135,000 provision for loss on OREO, a $36,000 or 0.8% increase in salaries and employee benefits, a $223,000 or 55.9% increase in professional fees, primarily as a result of the Company’s trademark litigation expense, and a $20,000 or 10.4% increase in directors’ fees. Such increases were partially offset by an $118,000 or 19.5% decrease in FDIC insurance premiums that primarily resulted from the prior period special assessment.

Income Tax Expense (Benefit).Income tax (benefit) expense amounted to $(54,000) and $55,000 for the three months ended September 30, 2010 and 2009, respectively, resulting in effective tax rates of (34.8)% and 10.7%, respectively. The increase in income tax benefit was primarily due to a lower income before income tax benefit for the three months ended September 30, 2010 compared to income before income tax expense for the three months ended September 30, 2009.  Income tax benefit amounted to $(259,000) and $(4,000) for the nine months ended September 30, 2010 and 2009, respectively, resulting in effective tax rates of (120.5)% and (0.37)%, respectively. The increase in income tax benefit was primarily due to a lower amount of income before income tax benefit for the nine months ended September 30, 2010 compared to income before income tax benefit for the nine months ended September 30, 2009.

Liquidity and Capital Resources

Liquidity, represented by cash and cash equivalents, is a product of its cash flows from operations. The 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.  Management 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.  Cash flows are

35

generated through the retail deposit market, its traditional funding source, for use in investing activities.  In addition, the borrowings such as Federal Home Loan Bank advances may be utilized for liquidity or profit enhancement.  At September 30, 2010, the Company had $5.0 million of outstanding advances and approximately $135.3 million of additional borrowing capacity from the FHLB of Pittsburgh.  Further, the Company has access to the Federal Reserve Bank discount window.  At September 30, 2010, no such funds were outstanding.

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 Company.  At September 30, 2010, the total approved loan commitments outstanding amounted to $10.9 million.  At the same date, commitments under unused lines of credit amounted to $27.2 million.  Certificates of deposit scheduled to mature in one year or less at September 30, 2010 totaled $191.1 million.  Management believes that a significant portion of maturing deposits will remain with the Company.  For the three and nine month periods ended September 30, 2010, there were no material changes in contractual obligations that were outside of the ordinary course of business.  Management anticipates that it will continue to have sufficient cash flows to meet its current and future commitments.

Impact of Inflation and Changing Prices

The unaudited 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 Company’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.

Part I - - Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Not Applicable.

Part I - - Item 4.

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 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.

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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.

Part II - - Other Information

Item 1.  Legal Proceedings

On May 14, 2010, Alliance Bank filed a complaint against New Century Bank in the United States District Court for the Eastern District of Pennsylvania claiming trademark infringement, false designation of origin and unfair competition due to New Century Bank’s unauthorized adoption and use of Alliance Bank’s registered trademark of “Customer First”® in connection with providing banking and financial services, including doing business under the name “Customer 1st Bank.” Alliance Bank sought to enjoin New Century Bank from the use of its trademark as well as unspecified monetary damages. In its answer to the complaint, New Century Bank filed a counterclaim against Alliance Bank alleging that the trademark is invalid.

On July 27, 2010, the District Court, following an evidentiary hearing and oral argument, found that Alliance Bank was likely to succeed on the merits of the trademark infringement case at trial and granted Alliance Bank’s motion for a preliminary injunction against New Century Bank prohibiting its use of the name Customer First or any similar name and requiring New Century Bank to immediately modify its signage and cease using the name Customer 1st Bank in its branches or otherwise using or disseminating marketing and promotional materials that uses or features the mark Customers 1st and/or Customers 1st Bank or any logo, trade name or trademark which incorporates such mark. Following entry of the preliminary injunction, the parties entered into a settlement agreement whereby New Century Bank agreed to permanently cease all use of the Customer First name or any similar name, withdraw its trademark applications for use of such names and transfer the registration of all related domain names to Alliance Bank, and Alliance Bank agreed to withdraw all other claims under the lawsuit.

Item 1A. Risk Factors

Not applicable because the Company is a “smaller reporting company.” However, see the section captioned “Risk Factors” in the Registration Statement on Form S-1 of the Alliance Bancorp, Inc. of Pennsylvania (File No. 333-169363) filed on September 14, 2010, as amended.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

(a) — (b)    Not Applicable

(c)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.

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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)
July  2010	—	$	—	—	31,412
August 2010	—	—		—	31,412
September  2010	20,000	8.02		20,000	11,412
Totals	20,000	$	8.02	20,000	11,412

(1)           All shares were repurchased under the Company’s previously announced repurchase program. 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.  The program expired on January 29, 2010. Subsequently, the Company announced the extension of the repurchase program that expired January 29, 2010 for an additional twelve months, and all shares are to be purchased in the open market or in privately negotiated transactions, as in the opinion of management, market conditions warrant.

Item 3.   Defaults Upon Senior Securities

Not Applicable

Item 4.  [Removed and Reserved]

Item 5.  Other Information

None

Item 6.  Exhibits

(a)The following exhibits are filed herewith:

Ex. No.	Description
31.1	Section 302 Certification of Chief Executive Officer
31.2	Section 302 Certification of Chief Financial Officer
32.1	Section 906 Certification of Chief Executive Officer
32.2	Section 906 Certification of Chief Financial Officer

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SIGNATURES

Under the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ALLIANCE BANCORP, INC. OF PENNSYLVANIA

Date: November 12, 2010	By:	/s/ Dennis D. Cirucci
		Dennis D. Cirucci, President and Chief Executive Officer
Date: November 12, 2010	By:	/s/ Peter J. Meier
		Peter J. Meier, Executive Vice President and Chief Financial Officer

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