10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission File No.:  001-33189

ALLIANCE BANCORP, INC. OF PENNSYLVANIA

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

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

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

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

Large accelerated filer o         Accelerated filer o         Non-accelerated filer x

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

As of March 16, 2007, the aggregate value of the 2,960,276 shares of Common Stock of the Registrant issued and outstanding on such date, which excludes 3,973,750 shares held by the Registrant’s mutual holding company, Alliance Mutual Holding Company, and 290,974 shares held by all directors and officers of the Registrant and the Registrant’s Employee Stock Ownership Plan (“ESOP”) as a group, was approximately $27.2 million.  This figure is based on the last known trade price of $9.20 per share of the Registrant’s Common Stock on March 16, 2007.  Although directors and officers and the ESOP were assumed to be “affiliates” of the Registrant for purposes of this calculation, the classification is not to be interpreted as an admission of such status.

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

DOCUMENTS INCORPORATED BY REFERENCE

(1)Portions of the Annual Report to Stockholders for the year ended December 31, 2006 are incorporated into Part II.

(2)Portions of the definitive proxy statement for the 2006 Annual Meeting of Stockholders are incorporated into Part III.

PART I

Item 1.  Business

General

Alliance Bank (“Alliance Bank” or the “Bank”) is a community oriented savings bank headquartered in Broomall, Pennsylvania.  We operate a total of nine banking offices located in Delaware and Chester Counties, which are suburbs of Philadelphia.  Our primary business consists of attracting deposits from the general public and using those funds, together with funds we borrow, to originate loans to our customers and invest in securities such as U.S. Government and agency securities, mortgage-backed securities and municipal obligations.  At December 31, 2006, we had $410.4 million of total assets, $333.8 million of total deposits and stockholders’ equity of $33.5 million.

On January 30, 2007, 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 Alliance Bank.  Each share of the Bank’s common stock was converted into 2.09945 shares of the Company.  The offering resulted in approximately $16.5 million in net proceeds.  Since Alliance Bancorp had no operations as of December 31, 2006, the discussion in this Item 1 covers the Bank, not the Company.

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

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

Market Area and Competition

Alliance Bank is headquartered in Broomall, Pennsylvania and conducts its business through eight offices located in Delaware County, Pennsylvania, and one office in Chester County, Pennsylvania.  The primary market areas served by Alliance Bank are Delaware and Chester Counties, Philadelphia, and the suburban areas to the west and south of Philadelphia, including southern New Jersey.  The areas served by the Bank are included in the Philadelphia Primary Metropolitan Statistical Area (“PMSA”).  The Philadelphia PMSA is the nation’s fourth largest metropolitan area based on total population.  Based on 2000 census data, the Philadelphia PMSA population was estimated at 5.0 million, including 1.0 million people in Delaware and Chester Counties.  Population growth in Chester County has increased at a relatively strong 1.7% annual rate during the 2000-2005 period, while the population in Delaware County has increased at a comparatively modest annual pace of 0.5% over that time.  The media household income in 2005 for Delaware and Chester Counties was $62,297 and $81,043, respectively, compared to $48,534 and $49,747, respectively, for the Commonwealth of Pennsylvania and the United States.  Delaware and Chester Counties are bedroom communities to nearly Philadelphia, although local employment has continued to grow as many employers have found suburban locations to be attractive.  The economy in the Bank’s market area is relatively diverse and includes the education, health and social services sector, manufacturing, the professional and scientific sector and the finance, insurance, real estate and leasing sector.  The largest employers in Delaware County include Boeing, the Keystone Crozer Health System, Wyeth-Ayerst Laboratories, Mercy Health and Villanova University, while the largest employers in Chester County include Vanguard Securities and QVC.

We face significant competition in originating loans and attracting deposits.  This competition stems primarily from commercial banks, other savings banks and savings associations and mortgage-banking companies.  There are more than 350 financial institution branches located in Delaware and Chester Counties (not including credit unions).  Many of the financial service providers operating in our market area are significantly larger, and have greater financial resources, than us.  We face additional competition for deposits from short-term money market funds and

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other corporate and government securities funds, mutual funds and from other non-depository financial institutions such as brokerage firms and insurance companies.

Lending Activities

General.  At December 31, 2006, the Bank’s total portfolio of loans receivable amounted to $238.6 million, or 58.2%, of the Bank’s $410.3 million of total assets at such time.  The Bank has traditionally concentrated its lending activities on first mortgage loans secured by residential property.  However, over the past several years, the Bank has placed an emphasis on loans secured by commercial real estate properties.  Consistent with such approach, commercial real estate loans amounted to $108.3 million or 45.4% of the total loan portfolio at December 31, 2006 as compared to $84.0 million or 40.4% at December 31, 2001.  To a significantly lesser extent, the Bank also originates multi-family loans, land and construction loans, consumer loans and commercial business loans.  At December 31, 2006, such loan categories amounted to $2.1 million, $11.8 million, $2.4 million and $5.5 million, respectively, or 0.9%, 4.9%, 1.0% and 2.3% of the total loan portfolio, respectively.

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

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

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

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

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

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

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Contractual Maturities.  The following table sets forth the scheduled contractual maturities of the Bank’s loans receivable at December 31, 2006.  Demand loans, loans having no stated schedule of repayments and no stated maturity and overdraft loans are reported as due in one year or less.  Adjustable-rate loans are reported on a contractual basis rather than on a repricing basis.  The amounts shown for each period do not take into account loan prepayments and normal amortization of the Bank’s loan portfolio.

	Real Estate Loans
	Single-family		Multi-family		Commercial		Land and Construction		Consumer and Other Loans		Commercial Business Loans		Total
	(In Thousands)
Amounts due in:
One year or less	$	485	$	181	$	2,932	$	8,963	$	1,489	$	440	$	14,490
After one year through three years	3,193		132		6,962		2,423		243		1,040		13,993
After three years through five years	5,046		1,434		13,485		—		283		1,148		21,396
After five years through fifteen years	36,773		284		56,786		—		271		567		94,681
Over fifteen years	62,551		57		28,903		—		93		2,391		93,995
Total (1)	$	108,048	$	2,088	$	109,068	$	11,386	$	2,379	$5,586		$	238,555
Interest rate terms on amounts due after one year:
Fixed	$	47,092	$	1,907	$	43,840	—		—		$	2,769	$	95,608
Adjustable	$	60,471	—		$	62,296	$	2,423	$	890	$	2,377	$	128,457

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

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

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The following table shows origination, purchase and sale activity of the Bank with respect to its loans during the periods indicated.

	Year Ended December 31,
	2006			2005			2004
	(In Thousands)
Real estate loan originations:
Single-family (1)	$	33,660		$	43,754		$	33,139
Multi-family	640			1,864			3,217
Commercial	21,073			22,658			17,330
Land and construction:
Residential	6,208			1,462			4,275
Commercial	6,782			—			2,958
Total real estate loan originations	68,363			69,738			60,919
Consumer originations:
Student	482			602			736
Savings account	433			477			491
Other	24			10			14
Total consumer loan originations	939			1,089			1,241
Commercial business originations	2,820			2,088			3,060
Total loan originations	72,122			72,915			65,220
Purchase of real estate loans:
Single-family	—			—			—
Multi-family	—			—			—
Residential construction	—			—			—
Commercial	3,649			508			1,000
Commercial construction	—			—			4,000
Total real estate loan purchases	3,649			508			5,000
Total loan originations and purchases	75,771			73,423			70,220
Less:
Principal loan repayments	(61,814		)	(51,577		)	(60,460		)
Loans and participations sold	(2,319		)	(7,525		)	(8,519		)
Other, net (2)	(46		)	(120		)	(210		)
Net increase	$	11,592		$	14,201		$	959

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

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

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

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

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

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

Since 1999, the Bank has provided single-family residential loan products to borrowers that did not meet the underwriting criteria of the Federal Home Loan Mortgage Corporation (‘FHLMC”) and the Federal National Mortgage Association (“FNMA”).  The Bank recognizes that these loans, which are considered subprime loans, have additional risk factors as compared to typical single-family residential lending.  These loans are generally not saleable in the secondary market due to the credit risk characteristics of the borrower, the underlying documentation, the loan-to-value ratio, or the size of the loan, among other factors.  At December 31, 2006, 2005 and 2004, the Bank’s single-family loan portfolio included $23.3 million or 21.5%, $24.2 million or 23.3% and $18.3 million or 20.5% of such loans, respectively.  The Bank reported $1.5 million or 6.5% and $1.9 million or 8.3% of these loans as non-performing at December 31, 2006 and February 28, 2007, respectively.  The Bank recognizes the additional risk factors associated with subprime lending and utilizes a higher risk-weighting factor in maintaining its allowance for loan losses with respect to these loans. In addition, management calculates and reports the delinquency ratio of its subprime loan portfolio to the Board of Directors on a monthly basis.

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

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

Single-Family Residential Real Estate Loans.  The Bank has historically concentrated its lending activities on the origination of loans secured primarily by first mortgage liens on existing single-family residences and intends to continue to originate permanent loans secured by first mortgage liens on single-family residential properties in the future. At December 31, 2006, $108.6 million or 45.5% of the Bank’s total loan portfolio consisted of single-family residential real estate loans.  Of the $108.6 million of such loans at December 31, 2006, $61.0 million or 56.3% had

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

The Bank’s ARMs typically provide for an interest rate which adjusts every year after an initial period of three, five, seven or ten years in accordance with a designated index (the national monthly median cost of funds or the weekly average yield on U.S. Treasury securities adjusted to a constant comparable maturity of one year) plus a margin.  Such loans are typically based on a 30-year amortization schedule.  The amount of any increase or decrease in the interest rate is presently limited to 2% per year, with a limit of 6% over the life of the loan.  The Bank’s adjustable-rate loans currently being originated are not assumable.  The Bank has not engaged in the practice of using a cap on the payments that could allow the loan balance to increase rather than decrease, resulting in negative amortization.  The adjustable-rate loans offered by the Bank, like many other financial institutions, provide for initial rates of interest below the rates which would prevail when the index used for repricing is applied.  However, the Bank underwrites the loan on the basis of the borrower’s ability to pay at the initial rate which would be in effect without the discount.  Although the Bank continues to emphasize ARMs, such loan products have not been as attractive due to the lower interest rate environment which has recently prevailed and the decrease in the spread between the rates offered on fixed and adjustable rate loans.

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

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

The Bank also offers home equity loans with fixed rates of interest and terms of 15 years or less.  The Bank does not require that it hold the first mortgage on the secured property; however, the balance on all mortgages on the secured property cannot exceed 90% of the value of the secured property.  At December 31, 2006, the Bank held a first lien on a majority of the properties securing home equity loans from the Bank. The Bank has placed an increased emphasis on home equity loans because of their attractive yields and shorter terms to maturity.  At December 31, 2006, home equity loans and lines amounted to $28.9 million or 12.1% of the total loan portfolio.

The Bank is permitted to lend up to 100% of the appraised value of the real property securing a residential loan; however, if the amount of a residential loan originated or refinanced exceeds 90% of the appraised value, the Bank is required by federal regulations to obtain private mortgage insurance on the portion of the principal amount that exceeds 84.0% of the appraised value of the security property, with the exception of home equity loans and lines.  Pursuant to underwriting guidelines adopted by the Board of Directors, the Bank will lend up to 95% of the appraised value of the property securing a single-family residential loan, and requires borrowers to obtain private mortgage insurance on the portion of the principal amount of the loan that exceeds 80% of the appraised value of the security property.  In addition, the Bank will lend up to 90% of the appraised value with no private mortgage insurance required for home equity loans and lines.

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

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

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

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

Multi-family and commercial real estate lending entails significant additional risks as compared with single-family residential property lending.  Such loans typically involve large loan balances to single borrowers or groups of related borrowers.  The payment experience on such loans is typically dependent on the successful operation of the real estate project.  The success of such projects is sensitive to changes in supply and demand conditions in the market for multi-family and commercial real estate as well as economic conditions generally.  At December 31, 2006, the Bank had no non-performing multi-family or commercial real estate loans.

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

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

The Bank’s commercial construction loans have been made to local developers and others for the purpose of developing commercial real estate properties such as small office buildings and hotels, storage facilities and commercial building renovations.  The application, credit review and disbursement process are similar to those mentioned above for the Bank’s residential construction loans.

The Bank’s construction loans generally have maturities of 12 to 36 months, with payments being made monthly on an interest-only basis.  These interest payments are generally paid out of an interest reserve, which is established in connection with the origination of the loan.  Generally, such loans adjust monthly based on the prime rate plus a margin of up to 2.0%. Residential and commercial real estate construction loans are generally made with maximum loan to value ratios of 80% and 75%, respectively, on an as completed basis.

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

The Bank has attempted to minimize the foregoing risks by, among other things, limiting the extent of its construction lending and has adopted underwriting guidelines which impose stringent loan-to-value, debt service and other requirements for loans which are believed to involve higher elements of credit risk, by limiting the geographic area in which the Bank will do business and by working with builders with whom it has established relationships.  At December 31, 2006, the Bank had no non-performing construction loans.

Consumer Loans.  The Bank offers consumer loans in order to provide a full range of financial services to its customers and because such loans generally have shorter terms and higher interest rates than mortgage loans.  The consumer loans presently offered by the Bank include student loans, deposit account secured loans and lines of credit.  Consumer loans amounted to $2.4 million or 1.0% of the total loan portfolio at December 31, 2006.  Student loans amounted to $1.8 million or 0.8% of the total loan portfolio at December 31, 2006.  Such loans are made to local students for a term of ten years, presently with adjustable interest rates.  The interest rate is determined by the U.S. Department of Education.  Loan repayment obligations do not begin until the student has completed his or her education.  The principal and interest on such loans is guaranteed by the U.S. Government.  Loans secured by deposit accounts amounted to $561,000 or 0.3% of the total loan portfolio at December 31, 2006.  Such loans are originated for up to 90% of the account balance, with a hold placed on the account restricting the withdrawal of the account balance.

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

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

Although commercial business loans generally are considered to involve greater credit risk than other certain types of loans, management intends to continue to offer commercial business loans to small businesses located in its primary market area.  The Bank had no non-performing commercial business loans at December 31, 2006.

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

Asset Quality

Loans are placed on non-accrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual.  When a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income.  The Bank does not accrue interest on real estate loans past due 90 days or more unless, in the opinion of management, the value of the property securing the loan exceeds the outstanding balance of the loan (principal, interest and escrows) and collection is probable.  The Bank provides an allowance for accrued interest deemed uncollectible.  Such allowance amounted to approximately $212,000 at December 31, 2006. Accrued interest receivable is reported net of the allowance for uncollected interest.  Loans may be reinstated to accrual status when all payments are brought current and, in the opinion of management, collection of the remaining balance can be reasonably expected.

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

Under accounting principles generally accepted in the United States of America (“GAAP”), the Bank is required to account for certain loan modifications or restructurings as “troubled debt restructurings.”  In general, the modification or restructuring of a debt constitutes a troubled debt restructuring if the Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that the Bank would not otherwise consider.  Debt restructurings or loan modifications for a borrower do not necessarily always constitute troubled debt restructurings, however, and troubled debt restructurings do not necessarily result in non-accrual loans.  The Bank did not have any troubled debt restructurings as of December 31, 2006.

Delinquent Loans.  The following table sets forth information concerning delinquent loans at December 31, 2006, in dollar amounts and as a percentage of each category of the Bank’s loan portfolio.  The amounts presented represent the total outstanding principal balances of the related loans, rather than the actual payment amounts which are past due.

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

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The following table sets forth the amounts and categories of the Bank’s non-performing assets at the dates indicated.  The Bank did not have any troubled debt restructurings at the dates indicated.

	December 31,
	2006			2005			2004			2003			2002
	(Dollars in Thousands)
Non-accruing loans:
Real estate:
Single-family	$	874		$	762		$	762		$	1,042		$	824
Multi-family	—			—			—			—			—
Commercial	—			222			580			2,188			3,683
Land and construction	—			—			—			1,925			4,084
Commercial business	—			—			—			—			—
Consumer	—			—			—			—			—
Accruing loans 90 days or more delinquent:
Real estate:
Single-family	649			942			603			718			585
Multi-family	—			—			—			—			—
Commercial	—			—			—			—			—
Land and construction	—			—			—			—			—
Commercial business	—			—			—			—			—
Consumer	36			14			21			18			19
Total non-performing loans	1,559			1,940			1,966			5,891			9,195
Other real estate owned:
Real estate acquired through, or in lieu of, foreclosure	—			1,795			3,475			2,607			1,369
Real estate held for development	—			—			—			—			—
Total other real estate owned	—			1,795			3,475			2,607			1,369
Total non-performing assets	$	1,559		$	3,735		$	5,441		$	8,498		$	10,564
Total non-performing loans as a percentage of total loans	0.65		%	0.85		%	0.92		%	2.77		%	4.77		%
Total non-performing assets as a percentage of total assets	0.38		%	0.96		%	1.42		%	2.27		%	2.87		%

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

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The Bank’s nonperforming assets, which consist of nonaccruing loans, accruing loans 90 days or more delinquent and other real estate owned (which includes real estate acquired through, or in lieu of, foreclosure) decreased to $1.6 million or 0.4% of total assets at December 31, 2006 from $3.7 million or 1.0% of total assets at December 31, 2005.  At December 31, 2006, the Bank’s $1.6 million of nonperforming assets consisted of $685,000 of accruing loans 90 days or more delinquent, $874,000 of nonaccrual loans and no other real estate owned. The decrease in nonperforming assets was primarily due to a $1.8 million decrease in other real estate owned and a $380,000 decrease in nonperforming loans.  At December 31, 2006, nonperforming loans consisted of $1.5 million in single-family residential real estate loans and $36,000 in consumer and other loans.  The Bank’s management continues to aggressively pursue the collection and resolution of all delinquent loans.

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

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

At December 31, 2006, the Bank had $2.7 million of classified assets, of which $929,000 of loans classified as special mention and $1.8 million of loans were classified as substandard.  The $929,000 of loan classified as special mention consisted of $792,000 in commercial real estate and $137,000 in commercial business loans.  The $1.8 million of loans designated as substandard consisted of $1.5 million of single-family real estate loans and $286,000 of commercial real estate loans.

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

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

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

Although management uses the best information available to make determinations with respect to the provisions for loan losses, additional provisions for loan losses may be required to be established in the future should economic or other conditions change substantially.  In addition, the Pennsylvania Department of Banking and the FDIC, as an

13

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.

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

	Year Ended December 31,
	2006			2005			2004			2003			2002
	(Dollars in Thousands)
Average loans receivable, net (1)	$	232,520		$	218,036		$	211,278		$	196,505		$	195,851
Allowance for loan losses, beginning of year	$	2,671		$	2,608		$	2,740		$	3,347		$	2,903
Net charge-offs	(11		)	(57		)	(342		)	(1,087		)	(1,516		)
Provision for loan losses	60			120			210			480			1,960
Allowance for loan losses, end of year	$	2,720		$	2,671		$	2,608		$	2,740		$	3,347
Net charge-offs to average loans receivable, net	0.01		%	0.03		%	0.16		%	0.55		%	0.77		%
Allowance for loan losses to total loans receivable	1.14		%	1.18		%	1.22		%	1.29		%	1.73		%
Allowance for loan losses to total non-performing loans	174.39		%	137.63		%	132.65		%	46.51		%	36.40		%
Net charge-offs to allowance for loan losses	0.40		%	2.13		%	13.11		%	39.67		%	45.29		%

(1)Includes mortgage loans held for sale.

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

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

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Investment Activities

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

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

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

The following table sets forth the fair value of the Bank’s mortgage-backed securities portfolio designated as available for sale at the dates indicated.

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

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

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The following table sets forth the purchases, sales and principal repayments of the Bank’s mortgage-backed securities for the periods indicated.

	Year Ended December 31,
	2006			2005			2004
	(In Thousands)
Mortgage-backed securities purchased	$	6,451		$	26,716		$	13,727
Mortgage-backed securities sold	—			—			—
Principal repayments	(11,412		)	(8,920		)	(6,942		)
Other, net	235			(931		)	(305		)
Net (decrease) increase	$	(4,726	)	$	16,865		$	6,479

Mortgage-backed securities generally increase the quality of the Bank’s assets by virtue of the insurance or guarantees that back them, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Bank.  During 2005, the Bank reduced its investments in U.S. Government and Agency securities and reinvested these funds primarily into 10 year mortgage-backed securities to improve cash flows.  At December 31, 2006, $2.9 million or 6.7% of the Bank’s mortgage-backed securities were pledged to secure various obligations of the Bank.  See Note 4 to the Consolidated Financial Statements.

Information regarding the contractual maturities and weighted average yield of the Bank’s mortgage-backed securities portfolio at December 31, 2006 is presented below.

	December 31, 2006
	One Year or Less			After One to Five Years			After Five to 15 Years			Over 15 Years			Total
	(Dollars in Thousands)
FHLMC securities	$	—		$	25		$	12,662		$	503		$	13,190
FNMA securities	—			1,229			21,203			3,613			26,045
GNMA securities	—			6			—			4,395			4,401
CMOs	—			—			—			—			—
Total	$	—		$	1,260		$	33,865		$	8,511		$	43,636	(1)
Weighted average yield	—		%	4.43		%	4.66		%	4.56		%	4.65		%

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

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

17

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

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

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

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The following table sets forth certain information relating to the Bank’s investment securities portfolio at the dates indicated.

	December 31,
	2006						2005				2004
	Carrying Value			Fair Value			Carrying Value		Fair Value		Carrying Value		Fair Value
	(In Thousands)
U.S. Government and agency securities	$	15,858		$	15,858		$	24,654	$	24,654	$	46,559	$	46,559
Municipal obligations	24,251			24,889			28,181		28,978		27,743		28,545
Mutual funds	19,195			19,195			19,244		19,244		19,595		19,595
Total	$	59,304	(1)	$	59,942	(1)	$	72,079	$	72,876	$	93,897	$	94,699

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

Information regarding the contractual maturities and weighted average yield of the Bank’s investment securities portfolio at December 31, 2006 is presented below.  Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	At December 31, 2006
	One Year or Less			After One to Five Years			After Five to 10 Years			Over 10 Years			Total
	(Dollars in Thousands)
U.S. Government and agency securities	$	1,988		$	12,884		$	986		$	—		$	15,858	(1)
Municipal obligations	—			340			3,602			20,309			24,251		(2)
Mutual funds	19,195			—			—			—			19,195		(3)
Total	$	21,183		$	13,224		$	4,588		$	20,309		$	59,304
Weighted average yield	5.04		%	4.23		%	4.06		%	4.76		%	4.58		%

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

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

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

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Sources of Funds

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

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

The Bank considers its primary market area to be Delaware and Chester counties, Pennsylvania.  The Bank attracts deposit accounts by offering a wide variety of accounts, competitive interest rates, and convenient office locations and service hours.  In addition, the Bank maintains automated teller machines at its Broomall, Concordville, Havertown, Springfield, Lansdown, Paoli, and Secane offices.  The Bank utilizes traditional marketing methods to attract new customers and savings deposits, including print media advertising and direct mailings.  The Bank does not advertise for deposits outside of its primary market area or utilize the services of deposit brokers, and management believes that an insignificant number of deposit accounts were held by non-residents of Pennsylvania at December 31, 2006.

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

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

	December 31,
	2006				2005				2004
	Amount		Percent		Amount		Percent		Amount		Percent
	(Dollars in Thousands)
Passbook and statement savings accounts	$	43,512	13.04	%	$	54,869	18.43	%	$	62,680	21.85	%
Money market accounts	24,255		7.27		23,837		8.01		26,978		9.40
Certificates of deposit	200,228		59.98		167,580		56.29		155,630		54.25
NOW and Super NOW accounts	43,859		13.13		33,335		11.19		25,595		8.92
Non-interest bearing accounts	21,948		6.58		18,089		6.08		16,023		5.58
Total deposits at end of year	$	333,802	100.00	%	$	297,710	100.00	%	$	286,906	100.00	%

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

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

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

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

The following table presents the average balance of each deposit type and the average rate paid on each deposit type for the periods indicated.

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

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The following table presents, by various interest rate categories, the amount of certificates of deposit at December 31, 2006 and 2005 and the amounts at December 31, 2006, which mature during the periods indicated.

	December 31,				Amounts at December 31, 2006 Maturing Within
Certificates of Deposit	2006		2005		One Year		Two Years		Three Years		Thereafter
	(In Thousands)
2.0% or less	$	192	$	338	$	192	$	—	$	—	$	—
2.01% to 4.0%	32,874		91,272		21,558		8,616		1,504		1,196
4.01% to 6.0%	167,162		75,377		154,353		2,392		2,580		7,837
6.01% to 8.0%	—		593		—		—		—		—
Total certificates of deposit	$	200,228	$	167,580	$	176,103	$	11,008	$	4,084	$	9,033

Borrowings.  The Bank may obtain advances from the FHLB of Pittsburgh upon the security of the common stock it owns in that bank and certain of its loans, provided certain standards related to creditworthiness have been met. Such advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities.  Such advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending.  At December 31, 2006, the Bank had $37.2 million of advances from the FHLB of Pittsburgh.  Of the $37.2 million of FHLB advances at December 31, 2006, $172,000 is due in 2007, $5.0 million is due in 2008, $5.0 million is due in 2009 and $32.0 million is due in 2010.  There are prepayment penalties associated with substantially all of the Bank’s FHLB advances.  The weighted average interest rate of the Bank’s FHLB advances was 6.30% as of December 31, 2006.

The following table sets forth certain information regarding borrowed funds at or for the dates indicated:

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

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Employees

The Bank had 67 full-time employees and 25 part-time employees at December 31, 2006.  None of these employees is represented by a collective bargaining agent, and the Bank believes that it enjoys good relations with its personnel.

Subsidiaries

Presently, the Bank has two wholly-owned subsidiaries, Alliance Delaware Corp., which holds and manages certain investment securities and Alliance Financial and Investment Services LLC which participates in commission fees. Alliance Delaware Corp. was formed in 1999 to accommodate the transfer of certain assets that are legal investments for the Bank and to provide for a greater degree of protection to claims of creditors. The laws of the State of Delaware and the court system create a more favorable environment for the business affairs of the subsidiary.  Alliance Delaware Corp. currently manages certain investments for the Bank, which, as of December 31, 2006, amounted to $51.8 million.  Alliance Financial and Investment Services LLC was established in 2003 to share in commission fees from non-insured alternative investment products.

Competition

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

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

REGULATION

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

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

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

Regulation of Alliance Bank

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

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

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

Insurance of Accounts.  The deposits of Alliance Bank are insured to the maximum extent permitted by the Deposit Insurance Fund, administered by the FDIC, and are backed by the full faith and credit of the U.S. Government.  As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, insured institutions.  It also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious threat to the FDIC.

Each FDIC-insured institution is assigned to one of three capital groups which are based solely on the level of an institution’s capitalB “well capitalized,” “adequately capitalized,” and “undercapitalized.”  These capital levels are defined in the same manner as under the prompt corrective action system discussed below.  These three groups are then divided into three subgroups which reflect varying levels of supervisory concern, from those which are considered to be healthy to those which are considered to be of substantial supervisory concern.  Assessment rates for insured institutions are determined semi-annually by the FDIC and currently range from zero basis points for well-capitalized healthy institutions, to 27 basis points for undercapitalized institutions with substantial supervisory concerns.  Alliance Bank currently is considered well capitalized and has a zero assessment rate.

In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established to recapitalize the predecessor to the Savings Association Insurance Fund.  The assessment rate for the third quarter of 2006 was 0.0126% of insured deposits and is adjusted quarterly.  These assessments will continue until the Financing Corporation bonds mature in 2019.

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

Deposit Insurance Reform.  On February 8, 2006, President George W. Bush signed into law legislation that merged the Bank Insurance Fund and the Savings Association Insurance Fund to form the Deposit Insurance Fund, eliminated any disparities in bank and thrift risk-based premium assessments, reduced the administrative burden of maintaining and operating two separate funds and established certain new insurance coverage limits and a mechanism for possible periodic increases.  The legislation also gave the FDIC greater discretion to identify the relative risks all institutions present to the Deposit Insurance Fund and set risk-based premiums.

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Major provisions in the legislation include:

·merging the Savings Association Insurance Fund and Bank Insurance Fund, which became effective March 31, 2006;

·maintaining basic deposit and municipal account insurance coverage at $100,000 but providing for a new basic insurance coverage for retirement accounts of $250,000.  Insurance coverage for basic deposit and retirement accounts could be increased for inflation every five years in $10,000 increments beginning in 2011;

·providing the FDIC with the ability to set the designated reserve ratio within a range of between 1.15% and 1.50%, rather than maintaining 1.25% at all times regardless of prevailing economic conditions;

·providing a one-time assessment credit of $4.7 billion to banks and savings associations in existence on December 31, 1996, which may be used to offset future premiums with certain limitations; and

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

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

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

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

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

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

At December 31, 2006, Alliance Bank’s capital ratios exceeded each of its capital requirements.

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

·acquiring or retaining a majority interest in a subsidiary;

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

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

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

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

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

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

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

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

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

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

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

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

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Privacy Requirements of the Gramm-Leach-Bliley Act.  The Gramm-Leach-Bliley Act of 1999 provided for sweeping financial modernization for commercial banks, savings banks, securities firms, insurance companies, and other financial institutions operating in the United States.  Among other provisions, the Gramm-Leach-Bliley Act places limitations on the sharing of consumer financial information with unaffiliated third parties.  Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of personal financial information with unaffiliated third parties.  Alliance Bank currently has a privacy protection policy in place and believes such policy is in compliance with the regulations.

Anti-Money Laundering.  On October 26, 2001, in response to the events of September 11, 2001, the President of the United States signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the USA PATRIOT Act).  The USA PATRIOT Act significantly expands the responsibilities of financial institutions, including savings and loan associations, in preventing the use of the U.S. financial system to fund terrorist activities.  Title III of the USA PATRIOT Act provides for a significant overhaul of the U.S. anti-money laundering regime.  Among other provisions, it requires financial institutions operating in the United States to develop new anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations.  Alliance Bank has established policies and procedures to ensure compliance with the USA PATRIOT Act’s provisions.

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

Regulation of Alliance Bancorp and Alliance Mutual Holding Company

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

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

·investing in the stock of a savings institution;

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

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

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

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

Activities which are permissible for non-grandfathered savings and loan holding companies include:

·furnishing or performing management services for a subsidiary savings institution;

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·conducting an insurance agency or escrow business;

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

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

·acting as trustee under a deed of trust;

·any other activity (i) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the Director of the Office of Thrift Supervision, by regulation, prohibits or limits any such activity for savings and loan holding companies, or (ii) in which multiple savings and loan holding companies were authorized by regulation to directly engage in on March 5, 1987;

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

·any activity permissible for financial holding companies under section 4(k) of the Bank Holding Company Act.

Permissible activities which are deemed to be financial in nature or incidental thereto under section 4(k) of the Bank Holding Company Act include:

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

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

·financial, investment, or economic advisory services;

·issuing or selling instruments representing interests in pools of assets that a bank is permitted to hold directly;

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

·activities previously determined by the Federal Reserve Board to be closely related to banking;

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

·portfolio investments made by an insurance company.

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

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

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

Qualified Thrift Lender Test.  Under Section 2303 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996, a savings association can comply with the Qualified Thrift Lender test by either meeting the Qualified Thrift Lender test set forth in the Home Owners’ Loan Act and implementing regulations or qualifying as a domestic building and loan association as defined in Section 7701(a)(19) of the Internal Revenue Code of 1986, as amended.  A savings bank subsidiary of a savings and loan holding company that does not comply with the Qualified Thrift Lender test must comply with the following restrictions on its operations:

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

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

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

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

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

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

In addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal stockholders.  Under Section 22(h), loans to a director, an executive officer and to a greater than 10% stockholder of a savings institution, and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the savings institution’s loans to one borrower limit (generally equal to 15% of the institution’s unimpaired capital and surplus).  Section 22(h) also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of the institution and (ii) does not give preference to any director, executive officer or principal stockholder, or certain affiliated interests of either, over other employees of the savings institution.  Section 22(h) also requires prior board approval for certain loans.  In addition, the aggregate amount of extensions of credit by a savings institution to all insiders cannot exceed the institution’s unimpaired capital and surplus.  Furthermore, Section 22(g) places additional restrictions on loans to executive officers.  At December 31, 2006, Alliance Bank was in compliance with the above restrictions.

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

The Director of the Office of Thrift Supervision may only approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings institutions in more than one state if (i) the multiple savings and loan holding company involved controls a savings institution which operated a home or branch office located in the state of the institution to be acquired as of March 5, 1987; (ii) the acquiror is authorized to acquire control of the savings institution pursuant to the emergency acquisition provisions of the Federal Deposit Insurance Act ; or (iii) the statutes of the state in which the institution to be acquired is located

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specifically permit institutions to be acquired by the state-chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions).

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

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

The Sarbanes-Oxley Act.  As a public company, Alliance Bancorp is subject to the Sarbanes-Oxley Act of 2002, which implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from corporate wrongdoing.  The Sarbanes-Oxley Act’s principal legislation and the derivative regulation and rule-making promulgated by the Securities and Exchange Commission includes:

·the creation of an independent accounting oversight board;

·auditor independence provisions that restrict non-audit services that accountants may provide to their audit clients;

·additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer certify financial statements;

·a requirement that companies establish and maintain a system of internal control over financial reporting and that a company’s management provide an annual report regarding its assessment of the effectiveness of such internal control over financial reporting to the company’s independent accountants and that such accountants provide an attestation report with respect to management’s assessment of the effectiveness of the company’s internal control over financial reporting;

·the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement;

·an increase in the oversight of, and enhancement of certain requirements relating to audit committees of public companies and how they interact with the company’s independent auditors;

·the requirement that audit committee members must be independent and are absolutely barred from accepting consulting, advisory or other compensatory fees from the issuer;

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

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·expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods;

·a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions;

·disclosure of a code of ethics and the requirement of filing of a Form 8-K for a change or waiver of such code;

·mandatory disclosure by analysts of potential conflicts of interest; and

·a range of enhanced penalties for fraud and other violations.

Although Alliance Bancorp anticipates that it will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on its results of operations or financial condition.

FEDERAL AND STATE TAXATION

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

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

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

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

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

Minimum Tax.  The Internal Revenue Code imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax preferences (“alternative minimum taxable income” or “AMTI”).  The AMT is payable to the extent such AMTI is in excess of an exemption amount.  Net operating losses can offset no more than 90% of AMTI.  Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years.  Alliance Bank has been subject to the AMT and as of December 31, 2006, had $888,000 of AMT available as credit for carryover purposes.

Net Operating Loss Carryovers.  Net operating losses incurred in taxable years beginning before August 6, 1997 may be carried back to the three preceding taxable years and forward to the succeeding 15 taxable years.  For net operating losses in years beginning after August 5, 1997, other than 2001 and 2002, such net operating losses can be carried back to the two preceding taxable years and forward to the succeeding 20 taxable years.  Net operating losses arising in 2001 or 2002 may be carried back five years and may be carried forward 20 years.  At December 31, 2006, Alliance Bank had approximately $200,000 and $400,000 in net operating loss carryforwards expiring in 2025 and 2026, respectively, for federal income tax purposes.

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

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Other Matters.  Alliance Bank has not been audited by the IRS during the last five years.

Pennsylvania Taxation.  Alliance Bancorp is subject to the Pennsylvania Corporate Net Income Tax and Capital Stock and Franchise Tax.  The Corporation Net Income Tax rate for fiscal 2005 is 9.99% and is imposed on unconsolidated taxable income for federal purposes with certain adjustments.  In general, the Capital Stock Tax is a property tax imposed at the rate of approximately 0.489% (for 2005) of a corporation’s capital stock value, which is determined in accordance with a fixed formula based upon average net income and net worth.

Alliance Bank is subject to tax under the Pennsylvania Mutual Thrift Institutions Tax Act (the “MTIT”), as amended to include thrift institutions having capital stock.  Pursuant to the MTIT, the tax rate is 11.5%.  The MTIT exempts Alliance Bank from other taxes imposed by the Commonwealth of Pennsylvania for state income tax purposes and from all local taxation imposed by political subdivisions, except taxes on real estate and real estate transfers.  The MTIT is a tax upon net earnings, determined in accordance with U.S. generally accepted accounting principles with certain adjustments.  The MTIT, in computing income under U.S. generally accepted accounting principles, allows for the deduction of interest earned on state and federal obligations, while disallowing a percentage of a thrift’s interest expense deduction in the proportion of interest income on those securities to the overall interest income of Alliance Bank.  Net operating losses, if any, thereafter can be carried forward three years for MTIT purposes.  At December 31, 2006, the Bank had approximately $200,000, $100,000 and $600,000 in NOL carryforwards expiring in 2007, 2008 and 2009, respectively, for state tax purposes.

Item 1A. Risk Factors

Like all financial companies, the Company’s business and results of operations are subject to a number of risks, many of which are outside of the Company’s control.  In addition to the other information in this report, readers should carefully consider that the following important risk factors, among others, could materially impact the Company’s business and future results of operations.  In addition, in analyzing whether to make or continue an investment in the Company’s securities, investors should consider, among other factors, the following risk factors.

Our Loan Portfolio Includes A Significant Amount of Loans Which Have a Higher Risk of Loss than Conforming, Single-Family Residential Mortgage Loans.

As of December 31, 2006, $108.3 million or 45.4% of our loan portfolio consisted of commercial real estate loans.  In addition, at such date, we had $23.3 million of single-family residential mortgage loans considered subprime loans, generally due to the borrowers’ credit scores being below certain regulatory thresholds, $11.8 million of construction loans and $2.1 million of multi-family residential real estate loans.  Commercial real estate loans, subprime residential mortgage loans, construction loans and multi-family residential mortgage loans all are generally considered to have a higher risk of loss than conforming, single-family residential mortgage loans.  Commercial real estate and multi-family residential real estate loans generally are considered to have a higher risk of loss because repayment of the loans often depends on the successful operation of a business or the underlying property securing the loan.  Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Accordingly, an adverse development with respect to one loan or one credit relationship can expose us to greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan. We seek to minimize these risks through our underwriting policies, which require such loans to be qualified on the basis of the property’s net income and debt service coverage ratio; however, there is no assurance that our underwriting policies will protect us from credit-related losses.  Construction loans generally have a higher risk of loss than single-family residential mortgage loans due primarily to the critical nature of the initial estimates of a property’s value upon completion of construction compared to the estimated costs, including interest, of construction as well as other assumptions.  If the estimates upon which construction loans are made prove to be inaccurate, we may be confronted with projects that, upon completion, have values which are below the loan amounts.  Commercial and multi-family real estate loans and construction loans are also typically larger than single-family residential mortgage loans. The deterioration of one or more of these loans could cause a significant increase in non-performing loans, which could adversely affect our results of operations by requiring us to increase our provisions for loan losses.  The net proceeds from the offering will increase our capital and facilitate our ability to make larger commercial real estate and construction loans by increasing our internal loans to one borrower limits.  We expect to make larger commercial real estate and construction loans and to increase our construction lending activity upon completion of the reorganization and the offering.  By their nature, subprime loans are generally considered to have a greater degree of credit risk than conforming residential mortgage loans because the lower credit score of the borrower may indicate a reduced ability to remain current on loan payments.  As a result of the composition of our loan portfolio, our credit risk profile will be higher than traditional thrift institutions that have higher concentrations of one- to four-family residential loans.

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Rising Interest Rates May Hurt Our Profits.

Interest rates were recently at historically low levels.  However, since June 30, 2004, the U.S. Federal Reserve has increased its target for the federal funds rate 17 times from 1.00% to 5.25%.  If interest rates continue to rise, and if rates on our deposits continue to reprice upwards faster than the rates on our loans and investments, we would experience continued compression of our interest rate spread and net interest margin, which would have a negative effect on our profitability.  For the year ended December 31, 2004, our average interest rate spread and our net interest margin amounted to 3.00% and 3.23%, respectively.  These ratios have steadily declined since such time.  Our average interest rate spread declined to 2.74% for the year ended December 31, 2005 and to 2.49% for the year ended December 31, 2006.  Correspondingly, our net interest margin decreased to 3.00% and 2.82% for such respective periods.  In addition, increases in interest rates could increase our cost of funds with respect to any new borrowings that we may obtain in the future.

A Significant Percentage of Our Assets Are Invested in Lower Yielding Investments Which Has Hindered and May Continue To Hinder Our Ability To Be More Profitable.

Our results of operations are significantly affected by changes in interest rates and are substantially dependant on our net interest income, which is the difference between the interest income earned on our interest-earning assets and the interest expense paid on our interest-bearing liabilities.  At December 31, 2006, $48.3 million, or 11.8% of our assets were invested in cash or cash equivalents and $102.9 million or 25.1% of our assets were invested in investment and mortgage-backed securities which yield less than would be obtained if such funds were invested in loans. The Bank has maintained a significant portion of its assets in short-term liquid assets to provide flexibility to invest in loans and other higher yielding assets in a rising rate environment, manage interest rate risk and provide interest income with minimal credit risk.

Increases in Market Rates of Interest Could Adversely Affect Our Stockholders’ Equity.

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

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

A Downturn in the Regional Economy or a Decline in Real Estate Values Could Hurt Our Net Income.

A significant majority of our loans are secured by real estate in the southeastern Pennsylvania.  As a result of this concentration, a downturn in the regional economy could cause significant increases in nonperforming loans, which would hurt our net income.  In recent years, there has been a significant increase in real estate values in our market area.  As a result of rising home prices, our residential loans generally have been well collateralized.  A decline in real estate values could cause some of our mortgage loans to become inadequately collateralized, which would expose us to a greater risk of loss.  Additionally, a decline in real estate values could adversely impact our portfolio of commercial real estate loans and could result in a decline in the origination of such loans.

Strong Competition Within Our Market Area Could Hurt our Profits and Slow Growth.

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

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We Operate in a Highly Regulated Environment and We May Be Adversely Affected By Changes in Laws and Regulations.

Alliance Bank is subject to extensive regulation, supervision and examination by the Pennsylvania Department of Banking and by the FDIC.  Alliance Bancorp and Alliance Mutual Holding Company are subject to regulation and supervision by the Office of Thrift Supervision.  Such regulation and supervision governs the activities in which an institution and its holding company may engage, and are intended primarily for the protection of the insurance fund and the depositors and borrowers of Alliance Bank rather than for holders of Alliance Bancorp common stock.  Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses.  Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.

Alliance Mutual Holding Company Owns a Majority of Alliance Bancorp’s Outstanding Common Stock and is Able to Control the Result of Most Matters Put to a Vote of Alliance Bancorp’s Stockholders.

Alliance Mutual Holding Company owns majority of our common stock, and, through its board of directors, is able to exercise voting control over most matters put to a vote of our stockholders.  The same directors and officers who manage Alliance Bancorp and Alliance Bank also will manage Alliance Mutual Holding Company.  No assurances can be given that Alliance Mutual Holding Company will not take action which the public stockholders believe to be contrary to their interests.  For example, Alliance Mutual Holding Company could approve the implementation of stock benefit plans, prevent a sale or merger transaction or defeat a candidate for Alliance Bancorp’s board of directors or other proposals put forth by the public stockholders.  Moreover, Alliance Mutual Holding Company’s ownership of a majority of the outstanding shares of Alliance Bancorp’s common stock is likely to perpetuate existing management and directors.  In addition, the Office of Thrift Supervision recently proposed that if stock benefit plans are implemented more than one year from an offering conducted by an institution in the mutual holding company format, there would be no specific requirement that stockholders other than the mutual holding company approve such plans.  Accordingly, if such proposal is adopted by the Office of Thrift Supervision and if Alliance Bancorp were to wait for more than one year after completion of its recent offering to implement its new stock option plan and stock recognition and retention plan, the approval of such plans solely by Alliance Mutual Holding Company would be sufficient for such plans to be adopted.

Our Stock Value May Suffer From Federal Regulations Restricting Takeovers.

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

Item 1B.  Unresolved Staff Comments

None

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Item 2.  Properties.

Offices and Properties

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

The following table sets forth certain information with respect to the office and other properties of the Bank at December 31, 2006.

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

(1)The lease expires in February 2010.

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

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

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(4)The lease expires in January 2009 with three successive options to extend the lease for five years each.

(5)The lease expires in September 2015.

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

(7)This branch opened in January 2005.  The lease expires May 2012.

Item 3.  Legal Proceedings.

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

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

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

PART II.

Item 5.  Market for Common Equity, and Related Stockholder Matters and Purchases of Equity Securities.

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

The following graph demonstrates comparison of the cumulative total returns for the common stock of the Company, the SNL Bank and Thrift Index, and the Nasdaq Composite Index since the close of trading of the Company’s common stock on December 31, 2001.  The graph represents $100 invested in the Company’s common stock as of December 31, 2001.  The cumulative total returns do include the payment of dividends by the Company.

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

Item 6.  Selected Financial Data.

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

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

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

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

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

Item 8.  Financial Statements and Supplementary Data.

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

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

Not applicable.

Item 9A.  Controls and Procedures.

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

No change in the Bank’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.

Item 9B.  Other Information.

Not applicable.

PART III.

Item 10.  Directors, Executive Officers and Corporate Governance.

Certain of the information required herein is incorporated by reference from the Definitive Proxy Statement.

Item 11.  Executive Compensation.

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

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

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

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

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

Item 14.  Principal Accounting Fees and Services.

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

PART III.

Item 15.  Exhibits and Financial Statement Schedules.

   (1) The following financial statements are incorporated by reference from Item 7 hereof (see Exhibit 13):

Report of Independent Registered Public Accounting Firm.

Consolidated Statements of Financial Condition at December 31, 2006 and 2005.

Consolidated Statements of Income for each of the Three Years in the Period

Ended December 31, 2006.

Consolidated Statements of Changes in Stockholders’ Equity for each of the

Three Years in the Period Ended December 31, 2006.

Consolidated Statements of Cash Flows for each of the Three Years

in the Period Ended December 31, 2006.

Notes to Consolidated Financial Statements.

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

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

No	Description
2.1	Agreement and Plan of Reorganization*
2.2	Plan of Additional Stock Issuance*
3.1	Federal Stock Charter of Alliance Bancorp, Inc. of Pennsylvania*
3.2	Bylaws of Alliance Bancorp, Inc. of Pennsylvania*
4.0	Form of Stock Certificate of Alliance Bancorp, Inc. of Pennsylvania*
10.1	Greater Delaware Valley Savings d/b/a Alliance Bank Supplemental Executive Retirement Plan and Participation Agreement*
10.2	Greater Delaware Valley Savings d/b/a Alliance Bank Endorsement Split Dollar Insurance Agreement*
10.3	Form of Agreement between Greater Delaware Savings Bank (doing business as Alliance Bank) and Dennis D. Cirucci and Peter J. Meier*
10.4	Form of Agreement between Greater Delaware Savings Bank (doing business as Alliance Bank) and Suzanne J. Ricci*
13.0	2006 Annual Report to Stockholders
31.1	Section 302 Certification of the Chief Executive Officer
31.2	Section 302 Certification of the Chief Financial Officer
32.1	Section 906 Certification of the Chief Executive Officer
32.2	Section 906 Certification of the Chief Financial Officer

*Incorporated herein by reference from the Company’s Registration Statement on Form S-1 (File No. 333-136853) filed with the Securities and Exchange Commission.

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SIGNATURES

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

ALLIANCE BANCORP, INC, OF PENNSYLVANIA
By:	/s/ Dennis D. Cirucci
	Dennis D. Cirucci
	President and
	Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/Dennis D. Cirucci	March 30, 2007
Dennis D. Cirucci President and Chief Executive Officer (Principal Executive Officer)
/s/Peter J. Meier	March 30, 2007
Peter J. Meier Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
/s/William E. Hecht	March 30, 2007
William E. Hecht Chairman of the Board
/s/J. William Cotter, Jr.	March 30, 2007
J. William Cotter, Jr. Director
/s/John A. Raggi	March 30, 2007
John A. Ragg  Director

39

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

40

EX-13

Exhibit 13

TABLE OF CONTENTS

Selected Consolidated Financial and Other Data	5
Management’s Discussion and Analysis	7
Report of Independent Registered Public Accounting Firm	23
Consolidated Financial Statements:
Consolidated Statements of Financial Condition	24
Consolidated Statements of Income	25
Consolidated Statements of Changes in Stockholders’ Equity	26
Consolidated Statements of Cash Flows	27
Notes to Consolidated Financial Statements	28
Corporate and Market Information	51

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The selected consolidated financial and other data of Alliance Bank set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the Consolidated Financial Statements and related Notes, appearing elsewhere in this Annual Report.

	As of or For the Year Ended December 31,
(Dollars in thousands, except per share amounts)	2006			2005			2004		2003		2002
Selected Financial Data
Total assets	$	410,350		$	389,035		$	382,134	$	374,374	$	368,432
Cash and cash equivalents	48,283			20,956			22,137		15,388		46,698
Loans receivable, net	235,761			224,294			209,712		208,678		187,016
Loans held for sale	125			—			565		640		1,153
Mortgage-backed securities	43,636			48,362			31,497		25,018		24,534
Investment securities	59,305			72,079			93,897		101,636		87,572
Other real estate owned	—			1,795			3,475		2,607		1,369
Deposits	333,802			297,710			286,906		274,619		268,904
Other borrowed money (1)	37,172			52,501			56,317		61,880		62,106
Stockholders’ equity	33,500			34,127			35,046		35,138		34,906
Non-performing assets (2)	1,559			3,735			5,441		8,498		10,564
Selected Operating Data
Interest and dividend income	$	21,752		$	19,883		$	19,419	$	19,822	$	22,140
Interest expense	11,331			8,907			7,820		8,475		11,146
Net interest income	10,421			10,976			11,599		11,347		10,994
Provision for loan losses	60			120			210		480		1,960
Net interest income after provision
for loan losses	10,361			10,856			11,389		10,867		9,034
Other income	1,452			1,133			1,444		1,465		1,296
Other expenses	10,509			10,972			10,385		10,096		9,671
Income before income taxes	1,304			1,017			2,448		2,236		659
Income tax expense (benefit)	(67		)	(157		)	329		74		(360		)
Net income	$	1,371		$	1,174		$	2,119	$	2,162	$	1,019
Basic and diluted earnings per share	$	0.40		$	0.34		$	0.62	$	0.63	$	0.30

(Footnotes on Following Page)

5

Selected Consolidated Financial and Other Data (continued)

	As of or For the Year Ended December 31,
	2006		2005		2004		2003		2002
Selected Operating Ratios
Average yield earned on interest-earning assets	5.89	%	5.43	%	5.41	%	5.53	%	6.17	%
Average rate paid on interest-bearing liabilities	3.39		2.69		2.41		2.63		3.44
Average interest rate spread (3)	2.49		2.74		3.00		2.90		2.73
Net interest margin (3)	2.82		3.00		3.23		3.17		3.06
Ratio of interest-earning assets to interest-bearing liabilities	110.66		110.74		110.52		111.00		110.66
Noninterest expense as a percent of average assets	2.69		2.89		2.73		2.69		2.59
Return on average assets	0.35		0.30		0.56		0.58		0.27
Return on average equity	4.05		3.39		5.99		6.19		2.91
Dividend payout ratio	90.39		105.54		58.47		57.31		121.59
Efficiency ratio	84.01		84.24		75.57		74.74		74.36
Ratio of average equity to average assets	8.68		8.94		9.31		9.31		9.37
Full-service offices at end of period	9		9		8		8		8
Asset Quality Ratios
Nonperforming loans and troubled debt restructurings as a percent of total loans receivable (2)	0.65		0.85		0.92		2.77		4.77
Nonperforming assets as a percent of total assets (2)	0.38		0.96		1.42		2.27		2.87
Allowance for loan losses as a percent of total loans receivable	1.14		1.18		1.22		1.29		1.73
Allowance for loan losses as a percent of nonperforming loans and troubled debt restructurings	174.39		137.63		132.65		46.51		36.40
Net charge-offs to average loans receivable outstanding during the period	0.02		0.03		0.16		0.55		0.77
Capital Ratios
Tier 1 risk-based capital ratio	13.48		14.92		15.38		15.52		15.52
Total risk-based capital ratio	14.55		16.06		16.52		16.74		16.77
Tier 1 leverage capital ratio	8.61		9.02		9.21		9.28		9.02

(1)Other borrowed money consists of Federal Home Loan Bank (“FHLB”) advances, demand notes issued to the U.S. Treasury and, until December 31, 2005, Employee Stock Ownership Plan (“ESOP”) debt.

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

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

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

Overview

Alliance Bank (or the “Bank”), is a community oriented savings bank headquartered in Broomall, Pennsylvania.  We operate a total of nine banking offices located in Delaware and Chester Counties, which are suburbs of Philadelphia.  Our primary business consists of attracting deposits from the general public and using those funds, together with funds we borrow, to originate loans to our customers and invest in securities such as U.S. Government and agency securities, mortgage-backed securities and municipal obligations.  At December 31, 2006, we had $410.4 million of total assets, $333.8 million of total deposits and stockholders’ equity of $33.5 million.

On January 30, 2007, 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 Alliance Bank.  Each share of the Bank’s common stock was converted into 2.09945 shares of the Company.  The offering resulted in approximately $18.1 million of gross proceeds.

This Management’s Discussion and Analysis section is intended to assist in understanding the financial condition and results of operations of Alliance Bank. The discussion and analysis does not include any comments relating to Alliance Bancorp, since Alliance Bancorp had no operations as of December 31, 2006. The information contained in this section should be read in conjunction with our financial statements and the accompanying notes to the consolidated financial statements and other sections contained in this report.

Certain highlights of our operating strategy are:

Expanding our Market Presence.  We have taken steps to increase our market penetration in our existing market areas by increasing the products and services we offer, incentivizing our employees to cross-sell our products and emphasizing customer service in an effort to capture more of each customer’s banking relationships.  In addition to organic growth, we continue to evaluate market expansion opportunities.  In 2005, we opened a new branch office in Chester County.  The net proceeds from the offering will facilitate our ability to consider additional new offices, either on a de novo basis or through acquisitions.  Currently, we have no plans, agreements or understandings with respect to any acquisitions.

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

Emphasizing Commercial Real Estate and Construction Loans.  At December 31, 2006, $108.3 million or 45.4% of our total loan portfolio consisted of commercial real estate loans.  In addition, at such date, we had $11.8 million of construction loans.  Commercial real estate and construction loans are attractive because they provide us with higher average yields than single-family residential mortgage loans and they typically have adjustable rates of interest and/or shorter terms to maturity than traditional single-family residential mortgage loans.  The net proceeds from the offering increased our capital and will facilitate our ability to make larger commercial and construction loans, subject to our current underwriting guidelines.  We intend to continue to emphasize growth in our commercial real estate and construction lending in a manner consistent with our loan underwriting policies and procedures.

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

Maintaining High Asset Quality.  At December 31, 2006, our ratio of total non-performing assets to total assets was 0.38%, compared to 2.87% at December 31, 2002.  We will continue to strive to maintain high asset quality.

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Continuing Residential Mortgage Lending.  Historically, we were a traditional single-family residential mortgage lender, and we will continue to offer traditional single-family residential loan products.  In recent periods, we have emphasized home equity loans and lines of credit due to the shorter terms to maturity and adjustable interest rates which we generally offer on such products as well as consumer demand for home equity loans and lines of credit.  At December 31, 2006, home equity loans and lines of credit amounted to $28.9 million or 12.1% of the total loan portfolio.

Increasing Core Deposits.  We intend to increase our core deposits in order to reduce our cost of funds.  The Bank offers a wide variety of deposits to its customers and is competitive in the rates it offers although it does not necessarily seek to match the highest rates paid by competitors.  The Bank also promotes longer term deposits where possible and consistent with its asset liability management goals.  In addition to increasing its core deposits, the Bank continually reviews its borrowings as a source of funds and may determine to prepay additional borrowings, even if there would be a prepayment penalty, where in the judgment of management any penalty would be offset in a reasonable period through an improved net interest spread.  Management has determined not to repay or refinance such advances at this time because the current prepayment penalties upon early retirement would not be offset in a reasonable period of time through an improved net interest spread.

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

Our net income amounted to $1.4 million and $1.2 million for the years ended December 31, 2006 and 2005, respectively.  Some of the major factors and trends which have impacted our results in these periods include the following:

Compression of Our Net Interest Spread and Net Interest Margin.  Our average interest rate spread was 2.49% and 2.74% for the years ended December 31, 2006 and 2005, respectively.  Alliance Bank’s net interest margin, which is net interest income as a percentage of average interest-earning assets, was 2.82% and 3.00% for the years ended December 31, 2006 and 2005, respectively.  Initially, the compression of our interest rate spread and net interest margin was due primarily to the historically low market rates of interest which led to substantially lower yields on our interest-earning assets while the rates paid on our interest-bearing liabilities did not decline as rapidly.  More recently, our spread has compressed as the costs of our deposits have increased faster than the yields on our loans and securities.  We anticipate continued pressure on the Bank’s interest rate spread and margin.

Managing Non-Interest Expenses. Our other or non-interest expenses amounted to $10.5 million and $11.0 million for the years ended December 31, 2006 and 2005, respectively. The largest component of non-interest expense is salaries and employee benefits. Total other expenses decreased $462,000 or 4.2% to $10.5 million for the year ended December 31, 2006, compared to the same period in 2005.  The decrease was primarily due to a $655,000 or 9.8% decrease in salary and employee benefits, partially offset by a $177,000 or 37.0% increase in advertising and marking expenses.    The decrease in salaries and employee benefits was primarily due to a higher amount of post retirement benefits incurred in 2005 as compared to 2006.  Such post retirement benefits of $642,000, in 2005, were due to the retirement of the Bank’s CEO and two other senior officers.

8

Critical Accounting Policies

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

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

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

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

In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results, recent cumulative losses and our forecast of future taxable income.  In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.  These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business.  Any reduction in estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets.  An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

Other than Temporary Impairment of Securities.  The Bank is required to perform periodic reviews of individual securities in its investment portfolio to determine whether a decline in the fair value of a security is other than temporary.  A review of other-than-temporary impairment requires the Bank to make certain judgments regarding the

9

nature of the decline, its effect on the financial statements and the probability, extent and timing of a valuation recovery and the Bank’s intent and ability to hold the security.  Management evaluates securities for other than temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluations.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.  If the decline in the market value of a security is determined to be other than temporary we would recognize the decline as a realized loss on the income statement.

Asset and Liability Management

The ability to maximize net interest income is largely dependent upon the achievement of a positive interest rate spread that can be sustained during fluctuations in prevailing interest rates.  Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities which either reprice or mature within a given period of time.  The difference, or the interest rate repricing “gap”, provides an indication of the extent to which a bank’s interest rate spread will be affected by changes in interest rates.  A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities, and is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets.  Generally, during a period of rising interest rates, a negative gap within shorter maturities would adversely affect net interest income, while a positive gap within shorter maturities would result in an increase in net interest income, and during a period of falling interest rates, a negative gap within shorter maturities would result in an increase in net interest income while a positive gap within shorter maturities would have the opposite effect. The Bank’s one year gap position at December 31, 2006 was a negative 31.3% primarily due to the $128.5 million of certificate accounts which mature during the one year period subsequent to December 31, 2006. In order to minimize the potential for adverse effects of material and prolonged changes in interest rates on the Bank’s results of operations, the Bank’s management has implemented and continues to monitor asset and liability management policies to better match the maturities and repricing terms of the Bank’s interest-earning assets and interest-bearing liabilities.  Such policies have consisted primarily of: (i) emphasizing investment in adjustable-rate mortgage loans (“ARMs”) and shorter-term (15 years or less) mortgage-backed securities; (ii) originating short-term secured  commercial loans with balloon provisions or the rate on the loan tied to the prime rate; (iii) purchasing shorter-term (primarily two to ten years) investment securities of investment grade quality and U.S. Government Agency Bonds with terms of 15 years or less; (iv) selling longer-term (15 years or more) fixed-rate residential mortgage loans in the secondary market; (v) maintaining a high level of liquid assets (including investments and mortgage backed securities available for sale) that can be readily reinvested in higher yielding investments should interest rates rise;  (vi) emphasizing the retention of lower-costing savings accounts and other core deposits; (vii) using interest rate floors and prepayment penalties on loan products; and (viii) lengthening liabilities and locking in lower borrowing rates with longer terms whenever possible.

10

The following table summarizes the anticipated maturities or repricing of the Bank’s interest-earning assets and interest-bearing liabilities as of December 31, 2006 based on the information and assumptions set forth in the footnotes below.

	1 Year			1 to 3			3 to 5			5 to 15			Over 15
(Dollars in Thousands)	or less			Years			Years			Years			Years			Total
Interest-earning assets
Loans receivable (1)	$	41,159		$	30,316		$	59,955		$	99,700		$	6,676		$	237,806
Mortgage-backed securities (2)	7,005			1,260			669			33,248			1,454			43,636
Investment securities (3)	32,085			2,312			997			23,534			376			59,304
Other interest-earning assets	45,176															45,176
Total interest-earning assets	125,425			33,888			61,621			156,482			8,506			385,922
Interest-bearing liabilities
Savings accounts (4)	8,702			8,702			8,702			8,702			8,702			43,512
NOW accounts	43,860															43,860
Money market deposit accounts	24,255															24,255
Certificate accounts	176,874			14,272			8,721			361						200,228
Borrowed money	209			5,000			32,000									37,209
Total interest-bearing liabilities	253,900			27,974			49,423			9,063			8,702			349,064
Repricing GAP during the period	$	(128,475	)	$	5,914		$	12,198		$	147,419		$	(196	)	$	36,858
Cumulative GAP	$	(128,475	)	$	(122,562	)	$	(110,364	)	$	37,054		$	36,858
Ratio of GAP during the period  to total assets	(31.3		)%	1.4		%	3.0		%	35.9		%	(0.1		)%
Ratio of cumulative GAP to total assets	(31.3		)%	(29.9		)%	(26.9		)%	9.0		%	9.0		%

(1)Adjustable-rate loans are included in the period in which interest rates are next scheduled to adjust rather than     in the period in which they are contractually due to mature.  Fixed-rate loans are included in the period in which they are contractually due to mature.  Balances have been reduced by $874,000 for nonaccrual loans.

(2)Reflects the repricing of the underlying loans and/or the expected average life of the mortgage-backed security.

(3)   Reflects repricing or contractual maturity with respect to investment securities.

(4)   For savings accounts, which totaled $43.5 million or 13.0% of deposits at December 31, 2006, assumes    a decay rate of 20% per category.

Management believes that the assumptions utilized to evaluate the vulnerability of the Bank’s operations to changes in interest rates approximate actual experience and considers them reasonable; however, the interest rate sensitivity of the Bank’s assets and liabilities in the above table could vary substantially if different assumptions were used or actual experience differs from the historical experience on which they are based.

Although the actions taken by management of the Bank have reduced the potential effects of changes in interest rates on the Bank’s results of operations, significant increases in interest rates may adversely affect the Bank’s net interest income because the repricing of interest-bearing liabilities relative to interest-earning assets occurs within shorter periods and because the Bank’s adjustable-rate, interest-earning assets generally are not as responsive to changes in

11

interest rates as its interest-bearing liabilities.  This is primarily due to terms which generally permit only annual adjustments to loan interest rates and which generally limit the amount which interest rates thereon can adjust at such time and over the life of the related asset.

Financial Condition

The Bank’s total assets increased $21.3 million or 5.5% to $410.3 million at December 31, 2006, compared to $389.0 million at December 31, 2005.  This increase can be attributed to a $27.3 million or 130.4% increase in cash and cash equivalents as well as an $11.5 million or 5.1% increase in loans receivable.  The increase in cash and cash equivalents was primarily due to temporary excess liquidity due to an increase in customer deposits.  The increase in loans receivable was primarily due to new loan production.  These increases were partially offset by an $8.8 million or 20.1% decrease in investment securities available for sale, a $4.7 million or 9.8% decrease in mortgage-backed securities, and a $3.9 million or 13.9% decrease in investment securities held to maturity.  The decrease in investment securities available for sale, mortgage backed securities, and investment securities held to maturity was primarily due to calls and maturities within the portfolios and the Bank not reinvesting in these instruments at the same levels of the calls and maturities.  The proceeds from these calls and maturities were invested in cash and cash equivalents as well as fund loan growth.  New loan production amounted to $75.8 million for 2006 and included $35.3 million in residential and consumer lending, $23.9 million in commercial and business lending and $16.6 million in real estate construction lending. In addition, the Bank generally sells all fixed-rate residential loan originations, including servicing, with terms of 15 years or more in the secondary market. Such loans sold amounted to $2.3 million in 2006.  The Bank’s net loans receivable outstanding at December 31, 2006 grew $11.5 million or 5.1% to $235.8 million as compared to $224.3 million at December 31, 2005.  The Bank remains committed to continuing its lending emphasis on developing and growing new and existing relationships with both retail and commercial customers.

Total liabilities increased $21.9 million or 6.2% to $376.8 million at December 31, 2006, compared to $354.9 million at December 31, 2005.  This increase was primarily due to a $32.2 million or 11.5% increase in interest-bearing deposits, a $3.9 million or 21.3% increase in non-interest bearing deposits, and a $1.1 million or 24.3% increase in accrued expenses and other liabilities.   These increases were partially offset by a decrease of $15.0 million or 28.8% in FHLB advances.  The decrease in FHLB advances was primarily due to the pay down of certain advances that occurred during 2006.  Funds provided from the increase in customer deposits were primarily used for the origination of loans and invested in cash and cash equivalents.  Stockholders’ equity decreased $627,000 or 1.8% to $33.5 million as of December 31, 2006 compared to $34.1 million at December 31, 2005.  This decrease was primarily due to a $759,000 increase in accumulated other comprehensive loss and $1.2 million of dividends declared and paid which were partially offset by net income of $1.4 million during the year ended December 31, 2006.

The Bank’s nonperforming assets, which consist of nonaccruing loans, accruing loans 90 days or more delinquent and other real estate owned (which includes real estate acquired through, or in lieu of, foreclosure) decreased to $1.6 million or 0.4% of total assets at December 31, 2006 from $3.7 million or 1.0% of total assets at December 31, 2005.  At December 31, 2006, the Bank’s $1.6 million of nonperforming assets consisted of $686,000 of accruing loans 90 days or more delinquent, $874,000 of nonaccrual loans and no OREO. The decrease in nonperforming assets was primarily due to a $1.8 million decrease in OREO. During 2006, the Bank sold two commercial real estate properties, which at December 31, 2005 were recorded at $1.8 million.  The larger of these two properties was sold and settled in January of 2006 and the Bank realized a gain of approximately $100,000.  The other property was sold and settled in February of 2006 and the Bank realized a loss of approximately $3,000.  In June of 2006, the Bank recognized an additional gain of $25,000 related to these properties.  At December 31, 2006 nonperforming loans consisted of $1.5 million in single-family residential real estate loans and $36,000 in consumer and other loans.  The Bank’s management continues to aggressively pursue the collection and resolution of all delinquent loans.

At December 31, 2006, the Bank’s total allowance for loan losses amounted to $2.71 million, as compared to $2.67 million at December 31, 2005.  The increase was due to $60,000 in provisions to maintain an appropriate allowance level in light of factors such as the level of nonperforming loans and the current economic environment.  In addition, in 2006, the Bank’s net charge-offs amounted to $11,000.  At December 31, 2006, the Bank’s allowance for loan

12

losses amounted to 174.39% of total nonperforming loans and 1.14% of total loans receivable, as compared to 137.63% and 1.18%, respectively, at December 31, 2005.

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

Results of Operations

General.  The Bank recorded net income of $1.4 million for the year ended December 31, 2006 as compared to net income of $1.2 million in 2005 and $2.2 million in 2004.  Net interest income decreased $554,000 for the year ended December 31, 2006, compared to 2005, primarily due to the increasing interest rate environment since June of 2004. This increasing interest rate environment has resulted in pricing pressure on the Bank’s deposit accounts as it attracts new customers and retains existing customers.  Other income increased $319,000 or 28.2% for the year ended December 31, 2006, compared to 2005.  This increase was primarily attributable to a $216,000 loss on the sale of securities realized by the Bank during 2005. These securities were sold to reduce interest rate risk, improve cash flows and increase interest income primarily through the reinvestment of funds into commercial loans and, to a lesser extent, mortgage-backed securities. The Bank did not experience a similar loss during the 2006 period. In addition, during 2006, the Bank recognized a gain on sale of other real estate owned of $122,000 compared to a $12,000 loss for the comparable period in 2005.   Other expenses decreased by $462,000 primarily due to decreases in salaries and employee benefits.  These decreases were due to costs incurred in 2005 in connection with the early retirement of certain senior officers.  These retirement costs were lower in 2006.  The provision for loan losses decreased $60,000 primarily due to decreases in both nonperforming loans and net loan charge-offs.  The income tax benefit decreased $90,000 due to a higher amount of pretax income for the year ended December 31, 2006, compared to 2005.

The Bank recorded net income of $1.2 million for the year ended December 31, 2005 as compared to net income of $2.1 million in 2004.  Net interest income decreased $624,000 for the year ended December 31, 2005, compared to 2004, primarily due to the increasing interest rate environment since June of 2004. This increasing interest rate environment has resulted in pricing pressure on the Bank’s deposit accounts as it attracts new customers and retains existing customers.  Other income decreased $311,000 or 21.5% for the year ended December 31, 2005, compared to 2004.  This decrease was primarily attributed to the $216,000 loss on the sale of securities realized by the Bank during 2005. Other expenses increased by $587,000 primarily due to increases in salaries and employee benefits and expenses related to premises and fixed assets.  These increases were due to costs incurred in connection with the early retirement of certain senior officers and expenses related to the opening of our ninth branch office.  The provision for loan losses decreased $90,000 primarily due to decreases in both nonperforming loans and net loan charge-offs.  The provision for income tax expense decreased $486,000 due to a lower amount of pretax income for the year ended December 31, 2005, compared to 2004.

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Average Balances, Net Interest Income and Yields Earned and Rates Paid.  The following average balance sheet table sets forth for the periods indicated, information on the Bank regarding:  (i) the total dollar amounts of interest income on interest-earning assets and the resulting average yields; (ii) the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs; (iii) net interest income; (iv) interest rate spread; (v) net interest-earning assets (interest-bearing liabilities); (vi) the net yield earned on interest-earning assets; and (vii) the ratio of total interest-earning assets to total interest-bearing liabilities.  Information is based on average daily balances during the periods presented.

			Year Ended December 31,
	At
	Dec. 31,		2006						2005						2004
	2006
	Yield/		Average				Yield/		Average				Yield/		Average				Yield/
	Rate		Balance		Interest		Rate		Balance		Interest		Rate		Balance		Interest		Rate
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) (2) (3)	6.73	%	$	232,520	$	15,534	6.68	%	$	218,036	$	14,214	6.52	%	$	211,278	$	14,331	6.78	%
Mortgage-backed securities (3)	4.65		47,342		2,184		4.61		41,327		1,808		4.37		24,507		1,114		4.55
Investment securities	4.58		70,927		3,219		4.54		84,771		3,271		3.86		101,656		3,740		3.68
Other interest-earning assets	5.25		18,532		815		4.40		21,993		590		2.68		21,725		234		1.08
Total interest-earning assets	6.02		369,321		21,752		5.89		366,126		19,883		5.43		359,165		19,419		5.41
Noninterest-earning assets			20,942						20,874						21,056
Total assets			$	390,263					$	387,001					$	380,221
Interest-bearing liabilities:
Deposits	3.37		$	285,768	$	8,349	2.92		$	277,507	5,666		2.04		$	265,641	4,357		1.64
FHLB advances and other borrowings	6.29		47,990		2,982		6.21		53,116		3,241		6.10		59,326		3,463		5.84
Total interest-bearing liabilities	3.67		333,758		11,331		3.39		330,623		8,907		2.69		324,967		7,820		2.41
Noninterest-bearing liabilities			22,617						21,796						19,863
Total liabilities			356,375						352,419						344,830
Stockholders’ equity			33,888						34,582						35,391
Total liabilities and stockholders’ equity			$	390,263					$	387,001					$	380,221
Net interest-earning assets			$	35,563					$	35,504					$	34,198
Net interest income/interest rate spread	2.35	%			$	10,421	2.49	%			$	10,976	2.74	%			$	11,599	3.00	%
Net yield on interest-earning assets (4)							2.82	%					3.00	%					3.23	%
Ratio of interest-earning assets to interest-bearing liabilities							110.66	%					110.74	%					110.52	%

(1)Includes loans held for sale.

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

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

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

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

	Year Ended December 31,
	2006 vs. 2005									2005 vs. 2004
	Increase									Increase
	(Decrease) Due To									(Decrease) Due To
							Total									Total
	Increase						Increase									Increase
	Rate			Volume			(Decrease)			Rate			Volume			(Decrease)
(Dollars in Thousands)
Interest-earning assets:
Loans receivable	$	359		$	961		$	1,320		$	(580	)	$	463		$	(117	)
Mortgage-backed securities	102			274			376			(46		)	739			693
Investment securities	527			(579		)	(52		)	176			(645		)	(469		)
Other interest-earning assets	330			(105		)	225			353			3			356
Total interest-earning assets	1,318			551			1,869			(97		)	560			463
Interest-bearing liabilities:
Deposits	2,510			173			2,683			1,106			203			1,309
FHLB advances and other borrowings	59			(318		)	(259		)	150			(372		)	(222		)
Total interest-bearing liabilities	2,569			(145		)	2,424			1,256			(169		)	1,087
Increase (decrease) in net interest income	$	(1,251	)	$	696		$	(555	)	$	(1,353	)	$	729		$	(624	)

Net Interest Income.  Net interest income is determined by the Bank’s interest rate spread (i.e., the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities.  Net interest income decreased $555,000 or 5.1% to $10.4 million for the year ended December 31, 2006 compared to 2005. This decrease was primarily due to an increase in the average balances of deposits and an increase in rates paid on such deposits, partially offset by an increase in the average balances of loans and a decrease in the average balance of FHLB advances. Net interest income decreased $624,000 or 5.4% to $11.0 million for the year ended December 31, 2005 compared to 2004. This decrease was primarily due to an increase in the average balances outstanding of time deposits and an increase in rates paid on such deposits, partially offset by an increase in the average balances of loans and mortgage-backed securities.

Interest Income.  Interest income increased $1.9 million or 9.4% to $21.8 million for the year ended December 31, 2006, compared to the same period in 2005.  The increase was due to a $1.3 million or 9.3% increase in interest income on loans, a $376,000 or 20.8% increase in interest income from mortgage-backed securities and a $225,000 or 37.9% increase in interest income on balances due from depository institutions.  These increases were offset by a $52,000 or 2.0% decrease in interest income earned on investment securities.  The increase in interest income on loans was due to a $14.5 million increase in the average balance of the loan portfolio and a 16 basis point (one basis point is equal to 1/100 of a percent) increase in the average yield earned on loans.  The increase in interest income on mortgage-backed securities was due to a $6.0 million increase in the average balance of mortgage-backed securities and a 24 basis point increase in the average yield earned on such securities.  The increase in interest income on balances due from depository institutions was primarily due to a 172 or 64.1% basis point increase in the average

15

yield earned, partially offset by a $3.5 million decrease in the average balance.  The decrease in interest income on investment securities was due to a $13.8 million or 16.3% decrease in the average balance outstanding, partially offset by a 68 or 17.6% basis point increase in the average yield earned.  The decrease in the average balance outstanding and the increase in the average yield earned were primarily due to the maturity of lower yielding investment securities.  During 2006, the Federal Reserve’s increases in the federal funds rate has caused upward movement in short-term market interest rates but has had little or no change in longer-term market interest rates.

Interest income increased $463,000 or 2.4% to $19.9 million for the year ended December 31, 2005, compared to the same period in 2004.  The increase was due to a $693,000 or 62.2% increase in interest income on mortgage-backed securities and a $356,000 or 152.1% increase in interest income on balances due from depository institutions.  These increases were offset by a $469,000 or 12.5% decrease in interest income earned on investment securities and a $117,000 or 0.8% decrease in interest income on loans.  The increase in interest income on mortgage-backed securities was due to a $16.8 million increase in the average balance of mortgage-backed securities, partially offset by an 18 basis point decrease in the average yield earned on such securities.  The increase in the average balance was due to purchases funded by growth in customer deposits and the reinvestment of funds from the sale of investment securities.  During the second quarter of 2005, the Bank sold $12.0 million of U.S. Government agency available for sale securities and realized a $205,000 loss on the sale.  These securities were sold to reduce interest rate risk, improve cash flows and increase interest income primarily through the reinvestment of funds into commercial loans and, to a lesser extent, mortgage-backed securities.  The increase in income on balances due from depository institutions was primarily due to a 161 or 149.5% basis point increase in the average yield earned and a $268,000 increase in the average balance.  The decrease in interest income on investment securities was due to a $16.9 million or 16.6% decrease in the average balance outstanding, partially offset by an increase of 18 basis points in the average yield earned.  The decrease in the average balance outstanding and the increase in the average yield earned were primarily due to the sale of lower yielding investment securities available for sale.  During 2005 the Federal Reserve’s increases in the federal funds rate has caused upward movement in short-term market interest rates but has had little or no change in longer-term market interest rates.  The decrease in interest income on loans was due to a 26 basis point decline in the average yield earned, partially offset by a $6.8 million increase in the average balance of loans outstanding.

Interest Expense.  Interest expense increased $2.4 million or 27.2% to $11.3 million for the year ended December 31, 2006, compared to the same period in 2005.  This increase was due to an increase of $2.7 million or 47.4% in interest expense on deposits, partially offset by a decrease of $259,000 or 8.0% in interest expense on FHLB advances and other borrowings.  The increase in interest expense on deposits was due to a 43.1% or 88 basis point increase in the average rate paid and an $8.3 million or a 3.0% increase in the average balance outstanding.  This portion of interest expense is expected to continue to rise as the Bank develops new deposit relationships as well as responds to both the Federal Reserve’s increases in the federal funds rate and local competition.  The decrease in interest expense on FHLB advances and other borrowings was due to a $5.1 million or 9.7% decrease in the average balance outstanding which was partially offset by a 1.8% or 11 basis point increase in the average rate paid. The decrease in the average balance of FHLB advances was primarily attributable to the repayment of a $10.0 million advance in July of 2006 and, to a lesser extent, the maturity and repayment of a $5.0 million advance in December of 2006.  Substantially all $37.1 million in FHLB advances at December 31, 2006 are long-term, and have fixed-rates of interest. The weighted average rate of the Bank’s FHLB advances was 6.21% as of December 31, 2006.  The long-term, fixed-rate advances are subject to significant prepayment penalties upon early repayment and, therefore, management has determined not to repay or refinance such advances at this time.

Interest expense increased $1.1 million or 13.9% to $8.9 million for the year ended December 31, 2005, compared to the same period in 2004.  This increase was due to an increase of $1.3 million or 30.0% in interest expense on deposits, partially offset by a decrease of $222,000 or 6.4% in interest expense on FHLB advances and other borrowings.  The increase in interest expense on deposits was due to a 24.4% or 40 basis point increase in the average rate paid and an $11.9 million or a 4.5% increase in the average balance outstanding.  The decrease in interest expense on FHLB advances and other borrowings was due to a $6.2 million or 10.5% decrease in the average balance outstanding which was partially offset by a 4.5% or 26 basis point increase in the average rate paid. Substantially all $52.2 million in FHLB advances at December 31, 2005 are long-term, and have fixed-rates of interest. The weighted average rate of the Bank’s FHLB advances was 6.08% as of December 31, 2005.

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Provision for Loan Losses.  The Bank establishes provisions for loan losses, which are charges to operating results, in order to maintain a level of total allowance for losses that management believes, to the best of its knowledge, covers all known and inherent losses that are both probable and reasonably estimable, at each reporting date.  The allowance is based upon an assessment of prior loss experience, the volume and type of lending conducted by the Bank, industry standards, past due loans, economic conditions in the Bank’s market area and other factors related to the collectibility of the Bank’s loan portfolio.  The provision for loan losses amounted to $60,000, $120,000 and $210,000 for the years ended December 31, 2006, 2005 and 2004, respectively. The decrease in the provision for loan losses for 2006 and 2005, relative to respective prior periods, was primarily due to a decrease in nonperforming loans and the low level of growth in the commercial real estate loan portfolio.

Other Income.  Total other income increased $319,000 or 28.2% to $1.5 million for the year ended December 31, 2006, compared to the same period in 2005. During 2005, the Bank sold $12.0 million of U.S. Government agency available-for-sale securities and realized a $205,000 loss on sale.  These securities were sold to reduce interest rate risk, improve cash flows and increase interest income primarily through the reinvestment of funds into commercial loans and, to a lesser extent, mortgage-backed securities.  The Bank did not experience a similar loss during the 2006 period.  In addition, during 2006, the Bank recognized a gain on sale of other real estate owned of $122,000 compared to a $25,000 gain for the comparable period in 2005.  The Bank has collected a management fee from Greater Delaware Valley Holdings which reimburses the Bank for certain salary and overhead costs the Bank incurs on behalf of Greater Delaware Valley Holdings.  The management fees for 2006, 2005, and 2004 were $480,000, $456,000, and $420,000, respectively.  Total other income decreased $311,000 or 21.5% to $1.1 million for the year ended December 31, 2005, compared to the same period in 2004.  The decrease was primarily due to a $216,000 net loss on the sale of investment securities in 2005 compared to a $1,000 gain in 2004 and a $25,000 gain on the sale of other real estate owned in 2005 compared to a $132,000 gain in 2004.

Other Expenses.  Total other expenses decreased $462,000 or 4.2% to $10.5 million for the year ended December 31, 2006, compared to the same period in 2005.  The decrease was primarily due to a $655,000 or 9.8% decrease in salary and employee benefits, partially offset by a $177,000 or 37.0% increase in advertising and marketing expenses.    The decrease in salaries and employee benefits was primarily due to the higher amount of certain post retirement benefits incurred in 2005 as compared to 2006.  Such post retirement benefits of $642,000 in 2005 and $238,000 in 2006 were due to the retirement of the Bank’s CEO and two other senior officers.

Total other expenses increased $587,000 or 5.6% to $11.0 million for the year ended December 31, 2005, compared to the same period in 2004.  The increase was primarily due to a $620,000 or 10.3% increase in salary and employee benefits and a $216,000 or 13.3% increase in expenses of premises and fixed assets.  These increases were partially offset by a $219,000 or 94.8% decrease in the provision for loss on OREO, an $114,000 or 51.7% decrease in loan and OREO expense and a $46,000 or 11.6% decrease in professional fees.  The increase in salaries and employee benefits was primarily due to the addition of new personnel, normal salary increases, higher medical insurance premiums and certain post retirement benefits.  The increase in expenses of premises and fixed assets can be attributed to the Bank’s opening of the Paoli branch office in January of 2005.  The decrease in professional fees and loan and OREO expense was due to a decrease in nonperforming assets during the year.

Income Tax Expense (Benefit).  Income tax (benefit) expense amounted to $(67,000), $(157,000) and $329,000 for the years ended December 31, 2006, 2005 and 2004, respectively, resulting in effective tax rates of (5.1)%, (15.4)% and 13.4%, respectively.  The decrease in income tax benefit for the year ended December 31, 2006 was primarily due to the higher level of pretax income when compared to 2005.  The decrease in income tax expense for the year ended December 31, 2005 was primarily due to the lower level of pretax income when compared to 2004.  The negative effective tax rates primarily resulted from tax exempt income from Bank-owned life insurance and certain tax-exempt securities purchased by the Bank.

Liquidity and Capital Resources

The Bank’s liquidity, represented by cash and cash equivalents, is a product of its cash flows from operations.  The Bank’s primary sources of funds are deposits, borrowings, amortization, prepayments and maturities of outstanding loans and mortgage-backed securities, sales of loans, maturities and calls of investment securities and other short-term investments and income from operations.  Changes in the cash flows of these instruments are greatly influenced

17

by economic conditions and competition.  After the completion of its reorganization and stock offering in January of 2007, the Bank’s liquidity and capital position were further strengthened resulting from $16.5 million in net proceeds from the stock offering.  The Bank attempts to balance supply and demand by managing the pricing of its loan and deposit products while maintaining a level of growth consistent with the conservative operating philosophy of the management and board of directors.  Any excess funds are invested in overnight and other short-term interest-earning accounts.  The Bank generates cash flow through the retail deposit market, its traditional funding source, for use in investing activities.  In addition, the Bank may utilize borrowings such as Federal Home Loan Bank advances for liquidity or profit enhancement.  At December 31, 2006, the Bank had $37.2 million of outstanding advances and $134.5 million of additional borrowing capacity from the FHLB of Pittsburgh.  Further, the Bank has access to the Federal Reserve Bank discount window.  At December 31, 2006, the Bank had no such funds 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 Bank.  At December 31, 2006, the total approved loan commitments outstanding amounted to $12.2 million.  At the same date, commitments under unused lines of credit amounted to $24.7 million.  Certificates of deposit scheduled to mature in one year or less at December 31, 2006, totaled $176.9 million.  Management believes that a significant portion of maturing deposits will remain with the Bank.  Investment and mortgage-backed securities totaled $102.9 million at December 31, 2006, of which $39.1 million are scheduled to mature or reprice in one year or less.  The Bank anticipates that it will continue to have sufficient cash flows to meet its current and future commitments.

The following table summarizes the Bank’s contractual obligations by type of obligation and payment due date at December 31, 2006.

(Dollars in Thousands)

	December 31, 2006
	Less than 1 Year		1 to 3 Years		3 to 5 Years		More than 5 Years		Total
	(Dollars in Thousands)
FHLB advances	$	182	$	5,546	$	34,330	$	—	$	40,058
Maturing certificates of deposit	176,873		14,272		8,721		362		200,228
Operating leases	424		797		919		976		3,116
Total	$	177,479	$	20,615	$	43,970	$	1,338	$	243,402

On November 3, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Nos. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. This FSP nullifies certain requirements of EITF Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, and supersedes EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impair ment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” The guidance in this FSP amends SFAS Statement No. 115,”Accounting for Certain Investments in Debt and Equity Securities.” The FSP is effective for reporting periods beginning after December 15, 2005. The Bank has adopted this guidance.

18

The following table shows the fair value and unrealized losses on investments, aggregated by investment category and the length of time that individual securities had been in a continuous unrealized loss position at December 31, 2006.

(Dollars in Thousands)

	Less than 12 Months				12 Months or Longer
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Total Fair Value		Total Unrealized Losses
	(In Thousands)
Securities Available for Sale
U.S. Government obligations	$	3,986	$	12	$	10,872	$	127	$	14,858	$	139
Mutual funds	—		—		19,195		807		19,195		807
Mortgage-backed securities	9,199		35		32,490		930		41,689		965
Total securities available for sale	$	13,185	$	47	$	62,557	$	1,864	$	75,742	$	1,911
Securities Held to Maturity
Municipal obligations (at carrying amount)	$	1,366	$	25	$	1,966	$	21	$	3,332	$	46

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.  At December 31, 2006 securities in a gross unrealized loss position for twelve months or longer consisted of securities having an aggregate value depreciation of 2.9% from the Bank’s amortized cost basis.  These unrealized losses do not represent an other-than-temporary impairment at December 31, 2006 due to the intent and ability of the Bank to hold until maturity or an anticipated recovery in fair value.

As of December 31, 2006 management believes that the estimated fair value of the securities disclosed above is primarily dependent upon the movement in market interest rates particularly given the negligible inherent credit risk associated with these securities. These investment securities are comprised of securities that are rated investment grade by at least one bond credit rating service. Although the fair value will fluctuate as the market interest rates move, management believes that these fair values will recover as the underlying portfolios mature and are reinvested in market rate yielding investments. Mutual funds in an unrealized loss position for 12 months or longer consist of funds primarily invested in asset-backed securities. The Company has the ability and intent to hold these securities until such time as the value recovers or the securities mature. Management does not believe any individual unrea lized loss as of December 31, 2006 represents an other-than-temporary impairment.

The mutual funds held by the Bank are comprised primarily of adjustable rate and other short duration mortgage related securities with stated maturity dates.  The funds net asset values directly reflect the market value of the securities underlying the funds.  The mutual funds themselves generate no regular repayment of principal to the investor.  However, the securities underlying the funds regularly reprice and/or amortize, prepay or mature.  The principal proceeds received by the funds are regularly reinvested into similar securities at current market yields.  Given the relatively short duration of the investment securities underlying the funds, the Bank can reasonably forecast a recovery of the impairment that has resulted from the movement in market interest rates.  Based on that evaluat ion and the Bank’s ability and intent to hold these mutual funds for a reasonable period of time sufficient for a forecasted recovery of fair value, the Bank does not consider those securities to be other than temporarily impaired at December 31, 2006.

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Regulatory Capital Requirements

The following table summarizes the Bank’s total stockholders’ equity, FDIC regulatory capital, total FDIC risk-based assets, leverage and risk-based regulatory ratios at December 31, 2006.

(Dollars in Thousands)

Total stockholders’ equity or GAAP capital	$	33,500
Deduct: FDIC adjustment for securities available-for-sale	(693		)
FDIC leverage capital	34,193
Plus: FDIC tier 2 capital (1)	2,719
Total FDIC risk-based capital	$	36,912
FDIC quarterly average total assets for leverage ratio	$	397,048
FDIC net risk-weighted assets	253,697
FDIC leverage capital ratio	8.61%
Minimum requirement (2)	4.00% to 5.00%
FDIC risk-based capital - tier 1	13.48%
Minimum requirement	4.00%
FDIC actual capital (tier 1 & 2)	14.55%
Minimum requirement	8.00%

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

(2)The FDIC has indicated that most highly rated institutions which meet certain criteria will be required to maintain a ratio of 3%, and all other institutions will be required to maintain an additional cushion of 100 to 200 basis points. As of December 31, 2006, the Bank had not been advised of any additional requirements in this regard.

Recent Accounting Pronouncements

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”. This statement amends FASB Statements No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. This statement resolves issues addressed in “Statement 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interest in Securitized Financial Assets”. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Bank is still evaluating the impact of SFAS No. 155 but does not expect that the guidance will have a material effect on the Bank’s financial position or results of operations.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets”, an amendment of FASB Statement No. 140. This statement addresses the recognition and measurement of separately recognized servicing rights.  The statement clarifies when a servicing right should be separately recognized, requires servicing rights to be initially measured at fair value, and allows an entity to choose to subsequently measure its servicing rights at fair value.  The Statement is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006.  The Bank does not expect that the guidance will have a material effect on the Bank’s financial position or results of operations.

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In June 2006, the FASB issued FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”).  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  This guidance did not have a material effect on the Bank’s financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Bank is currently assessing the impact of this pronouncement.

In September 2006, the FASB issued SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires an employer to recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year, and recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes are reported in comprehensive income and as a separate component of stockholders’ equity.

On September 2006, the SEC staff published Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. SAB 108 addresses quantifying the financial statement effects of misstatements; specifically, how the effects of prior year uncorrected misstatements must be considered in quantifying misstatements in the current year financial statements. In addition, SAB 108 provides guidance on the correction of misstatements, including the correction of prior period financial statements for immaterial misstatements. Importantly, SAB 108 offers a “one-time” special transition provision for correcting certain prior year misstatements that were uncorrected as of the beginning of the fiscal year of adoption. SAB 108 is effective for fiscal years ending after November 15, 2006.  This guidance did not have a material effect on the Bank’s financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities— including an amendment of FASB Statements No. 115” SFAS No. 159 permits entities to choose to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value.   This Statement is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007.   The Bank is currently assessing the impact of this pronouncement.

The EITF reached a consensus on EITF Issue No. 06-4, “The Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF 06-4”). EITF 06-4 addresses whether the postretirement benefit associated with an endorsement split-dollar life insurance arrangement is effectively settled in accordance with Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” and APB Opinion No. 12 “Omnibus Opinion—1967” upon entering into such an arrangement. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. Management is considering the impact, if any, that may result from the adoption of EITF 06-4.

The EITF reached a consensus on EITF Issue No. 06-5, “Accounting for Purchases of Life Insurance—Determining the Amount that Could be Realized in Accordance with FASB Technical Bulletin No. 85-4” (“EITF 06-5”). EITF 06-5 addresses (i) whether a policyholder should consider any additional amounts included in the contractual terms of the insurance policy other than the cash surrender value in determining the amount that could be realized under the insurance contract in accordance with Technical Bulletin 85-4, (ii) whether a policyholder should consider the contractual ability to surrender all of the individual-life policies (or certificates in a group policy) at the same time in determining the amount that could be realized under the insurance contract in accordance with Technical Bulletin 85-4 and (iii) whether the cash surrender value component of the amount that could be realized under the insurance contract in accordance with Technical Bulletin 85-4 “Accounting for Purchases of Life Insurance” should be

21

discounted in accordance with APB Opinion No. 21 “Interest on Receivables and Payables”, when contractual limitations on the ability to surrender a policy exist. EITF 06-5 is effective for fiscal years beginning after December 15, 2006. Management believes the impact, as a result of adopting EITF 06-5 effective January 1, 2007, will not be material to our Consolidated Financial Statements.

Impact of Inflation and Changing Prices

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

Controls and Procedures

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

No change in the Bank’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.

Forward-Looking Statements

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

22

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Alliance Bank:

We have audited the accompanying consolidated statements of financial condition of Alliance Bank and subsidiaries (the “Bank”) as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006.  These financial statements are the responsibility of the Bank’s management.  Our responsibility is to express an opinion on these financial statements based upon our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Alliance Bank and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, the Bank adopted Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” on December 31, 2006.

March 23, 2007

Alliance Bank and Subsidiaries

Consolidated Statements of Financial Condition

	December 31,
	2006			2005
Assets
Cash and cash due from depository institutions	$	3,105,561		$	1,903,300
Interest bearing deposits with depository institutions	45,176,979			19,052,434
Total cash and cash equivalents	48,282,540			20,955,734
Investment securities available for sale	35,053,226			43,898,412
Mortgage-backed securities available for sale	43,635,706			48,361,887
Investment securities held to maturity (fair value - 2006, $24,888,591; 2005, $28,977,675)	24,250,959			28,181,414
Loans receivable - net of allowance for loan losses - 2006, $2,719,20; 2005, $2,607,494	235,761,033			224,293,995
Loans held for sale	125,000			—
Accrued interest receivable	1,931,600			1,843,081
Premises and fixed assets - net	3,143,240			3,144,043
Other real estate owned (OREO)	—			1,795,000
Federal Home Loan Bank (FHLB) stock-at cost	2,548,500			2,738,100
Bank owned life insurance	10,102,712			9,739,424
Deferred tax asset	3,879,553			3,117,580
Prepaid expenses and other assets	1,635,749			966,730
Total Assets	$	410,349,818		$	389,035,400
Liabilities and Stockholders’ Equity
Liabilities
Non-interest bearing deposits	$	21,948,062		$	18,088,585
Interest bearing deposits	311,853,876			279,621,413
Demand notes issued to the U.S. Treasury	38,033			318,769
FHLB advances	37,171,822			52,182,427
Accrued expenses and other liabilities	5,838,059			4,697,063
Total liabilities	376,849,852			354,908,257
Commitments and Contingencies (Note10)
Stockholders’ Equity
Common stock, $.01 par value; 10,000,000 shares authorized; issued and outstanding - 2006, 3,441,383; 2005, 3,441,383	34,414			34,414
Additional paid-in capital	7,598,062			7,598,062
Retained earnings - partially restricted	28,537,679			28,405,911
Accumulated other comprehensive loss	(2,670,189		)	(1,911,244		)
Total stockholders’ equity	33,499,966			34,127,143
Total Liabilities and Stockholders’ Equity	$	410,349,818		$	389,035,400

See notes to consolidated financial statements.

24

Alliance Bank and Subsidiaries

Consolidated Statements of Income

	Years Ended December 31,
	2006			2005			2004
Interest and Fees and Dividend Income
Loans	$	15,535,078		$	14,214,204		$	14,331,411
Mortgage-backed securities	2,183,876			1,807,745			1,114,465
Investment securities:
Taxable	911,893			1,085,067			1,743,679
Tax - exempt	1,222,840			1,345,911			1,347,490
Dividends	1,084,650			839,470			648,693
Balances due from depository institutions	814,365			590,405			233,839
Total interest and dividend income	21,752,702			19,882,802			19,419,577
Interest Expense
Deposits	8,350,033			5,666,450			4,357,186
FHLB advances and other borrowed money	2,981,408			3,240,697			3,462,997
Total interest expense	11,331,441			8,907,147			7,820,183
Net Interest Income	10,421,261			10,975,655			11,599,394
Provision for Loan Losses	60,000			120,000			210,000
Net Interest Income After Provision for Loan Losses	10,361,261			10,855,655			11,389,394
Other Income
Service charges on deposit accounts	321,562			289,894			285,203
Management fees	480,000			456,000			420,000
Other fee income	148,123			177,071			194,663
Gain on sale of loans	14,529			53,227			46,279
Gain (loss) on sale of securities, net	1,719			(215,787		)	744
Gain on sale of OREO	121,936			25,107			132,218
Increase in cash surrender value of life insurance	363,288			345,216			359,328
Other	1,129			2,404			5,633
Total other income	1,452,286			1,133,132			1,444,068
Other Expenses
Salaries and employee benefits	6,003,410			6,657,942			6,037,555
Expenses of premises and fixed assets	1,858,338			1,836,006			1,619,874
Advertising and marketing	655,373			478,278			559,275
Professional fees	367,610			350,707			396,553
Loan and OREO expense	97,524			106,758			221,074
Provision for loss on OREO	—			12,000			231,000
Other noninterest expense	1,527,626			1,530,269			1,320,034
Total other expenses	10,509,881			10,971,960			10,385,365
Income Before Income Taxes	1,303,666			1,016,827			2,448,097
Income Tax (Benefit) Expense	(67,000		)	(157,000		)	329,000
Net Income	$	1,370,666		$	1,173,827		$	2,119,097
Basic and Diluted Earnings per Share	$	0.40		$	0.34		$	0.62

See notes to consolidated financial statements.

25

Alliance Bank and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

Years Ended December 31, 2006, 2005 and 2004

	Common Stock		Additional Paid-in Capital		Retained Earnings- Partially  Restricted			Stock Acquired by ESOP			Accumulated other Comprehensive Income (Loss)			Total Stockholder Equity			Comprehensive Income (Loss)
Balance, January 1, 2004	$	34,414	$	7,447,062	$	27,590,783		$	(148,571	)	$	214,274		$	35,137,962
Excess of fair value above cost of ESOP
shares committed to be released			89,000											89,000
Principal payments on ESOP loan								74,285						74,285
Net income					2,119,097									2,119,097			$	2,119,097
Dividends declared-$0.36 per share					(1,238,898		)							(1,238,898		)
Change in of additional minimum liability for pension plan-net of tax											(545,345		)	(545,345		)	(545,345		)
Change in net unrealized gain on securities available for sale-net of tax (1)											(590,299		)	(590,299		)	(590,299		)
Balance, December 31, 2004	$	34,414	$	7,536,062	$	28,470,982		$	(74,286	)	$	(921,370	)	$	35,045,802		$	983,453
Excess of fair value above cost of ESOP shares committed to be released			62,000											62,000
Principal payments on ESOP loan								74,286						74,286
Net income					1,173,827									1,173,827			$	1,173,827
Dividends declared-$0.36 per share					(1,238,898		)							(1,238,898		)
Change in additional minimum liability for pension plan-net of tax											(74,783		)	(74,783		)	(74,783		)
Change in net unrealized gain on securities available for sale-net of tax (1)											(915,091		)	(915,091		)	(915,091		)
Balance, December 31, 2005	$	34,414	$	7,598,062	$	28,405,911		$	—		$	(1,911,244	)	$	34,127,143		$	183,953
Net income					1,370,666									1,370,666			1,370,666
Dividends declared-$0.36 per share					(1,238,898		)							(1,238,898		)
Change in additional minimum liability for pension plan-net of tax											188,020			188,020			188,020
Change in net unrealized gain on securities available for sale-net of tax (1)											64,388			64,388			64,388
FAS 158 Adjustment, net of tax											(1,011,353		)	(1,011,353		)
Balance, December 31, 2006	$	34,414	$	7,598,062	$	28,537,679		$	—		$	(2,670,189	)	$	33,499,966		$	1,623,074

(1)	Disclosure of reclassification , net of tax for years ended:	2006		2005		2004
	Net unrealized (depreciation) arising during the year	$	65,523	$	(1,057,510)	$	(589,808)
	Less: reclassification adjustment for net gains (losses) included in net income (net of tax $584, $(73,368), and $253, respectively).	1,135		(142,419)		491
	Change in net unrealized gain on securities available for sale	$	64,388	$	(915,091)	$	(590,299)

See notes to consolidated financial statements.

26

Alliance Bank  and Subsidiaries

Consolidated Statements of Cash Flows

	Years Ended December 31,
	2006			2005			2004
Operating Activities
Net income	$	1,370,666		$	1,173,827		$	2,119,097
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Provision for:
Loan losses	60,000			120,000			210,000
Depreciation and amortization	646,186			643,485			593,523
Loss on other real estate owned	—			12,000			231,000
Gain on sale of loans	(14,529		)	(53,227		)	(46,279		)
(Gain) loss on sale of securities	(1,719		)	215,787			(744		)
Excess fair value above cost of ESOP	—			62,000			89,000
Gain on sale of OREO	(121,936		)	(25,107		)	(132,218		)
Origination of loans held for sale	(2,429,800		)	(7,005,950		)	(8,516,550		)
Deferred tax benefit	(371,000		)	(406,000		)	(248,000		)
Changes in assets and liabilities which provided (used) cash:
Loans sold in the secondary market	2,319,318			7,524,525			8,591,400
Accrued expenses and other liabilities	226,239			719,553			301,177
Prepaid expenses and other assets	(1,365,028		)	(243,995		)	(152,123		)
Accrued interest receivable	(88,519		)	(61,347		)	58,387
Net cash provided by operating activities	229,878			2,675,551			3,097,670
Investing Activities
Purchase of investment securities-available for sale	(7,000,000		)	(1,987,000		)	(29,335,000		)
Purchase of investment securities-held to maturity	(1,390,000		)	(958,000		)	(5,500,000		)
Purchase of mortgage-backed securities	(6,451,397		)	(26,715,726		)	(13,726,616		)
Loans originated and acquired	(73,340,821		)	(66,416,977		)	(61,703,866		)
Proceeds from maturities and calls of investment securities	20,028,032			9,310,724			36,984,247
Proceeds from the sale of securities available for sale	1,001,719			14,780,414			5,000,744
Redemption of FHLB Stock	189,600			293,000			189,800
Principal repayments of:
Loans	61,813,795			51,177,554			58,840,730
Mortgage-backed securities	11,412,745			8,920,434			6,942,784
Purchase of premises and fixed assets	(645,383		)	(413,895		)	(300,471		)
Proceeds from sale of OREO	1,916,936			2,329,618			698,629
Net cash provided by (used in) investing activities	7,535,226			(9,679,854		)	(1,909,019		)
Financing Activities
Dividends paid	(1,238,898		)	(1,238,898		)	(1,238,898		)
Increase in deposits	36,091,940			10,803,579			12,287,147
(Decrease) increase in:
Demand notes issued to the U.S. Treasury	(280,736		)	268,007			(478,555		)
FHLB Advances	(15,010,604		)	(4,009,989		)	(5,009,408		)
Net cash provided by financing activities	19,561,702			5,822,699			5,560,286
(Decrease) increase in Cash and Cash Equivalents	27,326,806			(1,181,604		)	6,748,937
Cash and Cash Equivalents, Beginning of Year	20,955,734			22,137,338			15,388,401
Cash and Cash Equivalents, End of Year	$	48,282,540		$	20,955,734		$	22,137,338
Supplemental Disclosures of Cash Flow Information-
Cash paid during the period for:
Interest (credited and paid)	$	11,331,442		$	8,907,147		$	7,820,183
Income taxes	$	130,000		$	235,000		$	100,000
Supplemental Disclosure of Noncash Investing Activity-
Loans transferred to other real estate owned	$	—		$	636,511		$	1,665,667

See notes to consolidated financial statements.

27

Alliance Bank and Subsidiaries

Notes to Consolidated Financial Statements

1.  Organizational Structure and Nature of Operations

On March 3, 1995, Alliance Bank, formerly Greater Delaware Valley Savings Bank, (the “Bank”) completed a reorganization from a Pennsylvania chartered mutual savings bank to a Pennsylvania chartered mutual holding company known as Greater Delaware Valley Holdings, a Mutual Company (the “Holding Company”) (“Reorganization”).  As part of the Reorganization, the Bank organized a Pennsylvania chartered stock savings bank and transferred substantially all of its assets and liabilities, including all of its deposit-taking, lending and other banking functions and its corporate name, to the newly created stock savings bank in exchange for 2,753,625 shares of its common stock. Concurrent with the Reorganization, the Bank sold 682,500 shares of common stock in a public offering at a price of $9.52 per share resulting in $6,500,000 of additional equity capital before offering expenses. The costs of issuing the common stock were deducted from the sale proceeds.

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

In conjunction with the Reorganization, the Bank established an Employee Stock Ownership Plan (“ESOP”) for full-time employees age 21 or older who have at least one year of credited service with the Bank. The ESOP borrowed $455,000 from and unrelated party to purchase 47,775 shares of the Bank’s common stock.

In December 1998, the Bank and the Holding Company announced their intention to purchase 44,100 and 8,400 shares, respectively, for the Bank’s ESOP and the Holding Company’s Director Retirement Plan. These purchases were completed during the quarter ended March 31, 1999. The ESOP borrowed $520,000 from the Holding Company to purchase 44,100 shares of the Bank’s common stock. Principal and interest payments on the loan will be made quarterly over a term of seven years at an interest rate of 7%. Accounting principles generally accepted in the United States of America require that any such borrowings by an ESOP be reflected as a liability and as a reduction of stockholders’ equity in the accompanying consolidated financial statements.  As of December 31, 2005 this note was fully repaid.

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

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

28

Bancorp to purchase 90,333 shares of common stock.  Principal and interest payments of the loan will be made quarterly over a term of 15 years at an interest rate of 8.25%.

Nature of Operations — The Bank is principally in the business of attracting deposits through its branch offices and investing those deposits together with funds from borrowings and operations in single-family residential, commercial real estate, commercial business and consumer loans. The Bank is primarily supervised by the Federal Deposit Insurance Corporation (“FDIC”) and the Pennsylvania Department of Banking.

2.  Summary of Significant Accounting Policies

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

Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities.  It also requires the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, deferred tax assets and evaluation of investment securities for other than temporary impairment.

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

The Bank operates only in the U.S. domestic market, primarily in Pennsylvania’s Delaware and Chester Counties.  For the years ended December 31, 2006, 2005, and 2004, there is no one customer that accounted for more than 10% of the Bank’s revenue.

Cash and Cash Equivalents — For purposes of reporting cash flows, cash and cash equivalents include cash and amounts due from depository institutions and interest-bearing deposits with depository institutions.  As of December 31, 2006, the Bank’s minimum reserve balance with the Federal Reserve Bank was $1,470,000.

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.

On November 3, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Nos. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain

29

disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. This FSP nullifies certain requirements of EITF Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, and supersedes EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” The guidance in this FSP amends SFAS Statement No. 115,”Accounting for Certain Investments in Debt and Equity Securities.” The FSP is effective for reporting periods beginning after December 15, 2005. The Bank has adopted this guidance.

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

The following table shows the fair value and unrealized losses on investments, aggregated by investment category and the length of time that individual securities have been continuous unrealized loss position.

	December 31, 2006
(Dollars in Thousands)
	Less than 12 Months				12 Months or Longer
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Total Fair Value		Total Unrealized Losses
	(In Thousands)
Securities Available for Sale
U.S. Government obligations	$	3,986	$	12	$	10,872	$	127	$	14,858	$	139
Mutual funds	—		—		19,195		807		19,195		807
Mortgage-backed securities	9,199		35		32,490		930		41,689		965
Total securities available for sale	$	13,185	$	47	$	62,557	$	1,864	$	75,742	$	1,911
Securities Held to Maturity
Municipal obligations (at carrying amount)	$	1,366	$	25	$	1,966	$	21	$	3,332	$	46

	December 31, 2005
(Dollars in Thousands)
	Less than 12 Months				12 Months or Longer
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Total Fair Value		Total Unrealized Losses
	(In Thousands)
Securities Available for Sale
U.S. Government obligations	$     9,890		$          82		$   14,764		$        236		$   24,644		$        318
Mutual funds	—		—		19,244		758		19,244		758
Mortgage-backed securities	18,483		383		19,216		608		37,699		991
Total securities available for sale	$	28,373	$	465	$	53,224	$	1,602	$	81,597	$	2,067
Securities Held to Maturity
Municipal obligations (at carrying amount)	$	4,180	$	39	$	558	$	15	$	4,738	$	54

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

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As of December 31, 2006 management believes that the estimated fair value of the securities disclosed above is primarily dependent upon the movement in market interest rates particularly given the negligible inherent credit risk associated with these securities. These investment securities are comprised of securities that are rated investment grade by at least one bond credit rating service. Although the fair value will fluctuate as the market interest rates move, management believes that these fair values will recover as the underlying portfolios mature and are reinvested in market rate yielding investments. Mutual funds in an unrealized loss position for 12 months or longer consist of funds primarily invested in asset-backed securities. The Company has the ability and intent to hold these securities until such time as the value recovers or the securities mature. Management does not believe any individual unrea lized loss as of December 31, 2006 represents an other-than-temporary impairment.

The mutual funds held by the Bank are comprised primarily of adjustable rate and other short duration mortgage related securities with stated maturity dates.  The funds net asset values directly reflect the market value of the securities underlying the funds.  The mutual funds themselves generate no regular repayment of principal to the investor.  However, the securities underlying the funds regularly reprice and/or amortize, prepay or mature.  The principal proceeds received by the funds are regularly reinvested into similar securities at current market yields.  Given the relatively short duration of the investment securities underlying the funds, the Bank can reasonably forecast a recovery of the impairment that has resulted from the movement in market interest rates.  Based on that evaluat ion and the Bank’s ability and intent to hold these mutual funds for a reasonable period of time sufficient for a forecasted recovery of fair value, the Bank does not consider those securities to be other than temporarily impaired at December 31, 2006.

Loans and Loans Held for Sale - The Bank grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans in southeastern Pennsylvania. The ability of the Bank’s debtors to honor their contract is dependent upon the real estate and general economic conditions. Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. The Bank defers all loan fee income, net of certain direct loan origination costs. The balance is accreted into income as a yield adjustment over the life of the loan using the interest method.

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

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

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

In July 2001, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 102, Selected Loss Allowance Methodology and Documentation Issues. SAB No. 102 expresses the SEC staff views on the development, and application of a systematic methodology for determining the allowance for loan losses in accordance with accounting principles generally accepted in the United States of America. Also, in July 2001, the federal banking agencies issued guidance, which was updated in December 2006, on this topic through the Federal

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Financial Institutions Examination Council interagency guidance, Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions. In management’s opinion, the Bank’s methodology and documentation of the allowance for loan losses meets the guidance issued.

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

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

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

Cash Surrender Value of Life Insurance — The Bank is the beneficiary of insurance policies on the lives of officers of the Bank. The Bank has recognized the amount that could be realized under the insurance policies as an asset in the statement of financial condition.

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

Interest Rate Risk - The Bank is engaged principally in providing first-mortgage loans to individuals and commercial enterprises.  At December 31, 2006, the Bank average interest-earning assets were approximately $369.3 million having a weighted average effective yield of 6.02% and average interest-bearing liabilities were approximately $333.8 million having a weighted average effective cost of 3.67%.  In general, interest-sensitive liabilities have a shorter duration than interest earning assets.  The shorter duration of the interest-sensitive liabilities indicates that the Bank is exposed to interest rate risk because, in a rising rate environment, liabilities will be repricing faster at higher interest rates, thereby reducing the market value of long-term assets and net interest income. As a consequence, management monitors the maturity and repricing structure of the Bank’s assets and liabilities in order to implement measures designed to reduce the interest rate sensitivity gap.

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

The Bank has also entered into a tax sharing agreement (under the Internal Revenue Section 1552) with the Holding Company and Alliance Delaware Corporation.  The agreement provides that the tax liability shall be apportioned among the members of the group in accordance with the ratio which that portion of the consolidated taxable income attributed to each member of the group having taxable income bears to the consolidated taxable income.  The Bank had $44,000 and $6,000 due to the Holding Company at December 31, 2006 and 2005, respectively.

Accounting for Stock-Based Compensation — The Bank adopted SFAS No. 123(R) “Share-Based Payment” on January 1, 2006.  Accordingly, the Bank recognizes an expense over the required service period for any stock options granted, modified, cancelled, or repurchased after that date and for the portion of grants for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards.  Adoption of SFAS

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No. 123(R) did not have a material impact to the consolidated financial statements, since all outstanding options granted to date are fully vested.

Prior to the adoption of SFAS No. 123(R) the Bank accounted for stock-based compensation under SFAS No. 123, Accounting for Stock-Based Compensation, which allowed the Bank to continue to measure compensation cost for employee stock compensation plans using the intrinsic value-based method of accounting under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, which generally did not result in compensation expense recognition for most plans.

Under the 1996 Stock Option Plan (the “Plan”) approved by the Bank’s stockholders, common stock totaling 68,250 shares had been reserved for issuance pursuant to the Plan. Stock options are generally granted at exercise prices not less than the fair value of common stock on the date of grant, and vest at the rate of 33 1/3 percent per year, commencing one year from the date of grant. The following is a summary of transactions under the Plan:

					Weighted Average
	Number of		Exercise		Exercise Price
	Option Shares		Price Range		per Share
Outstanding at January 1, 2004	17,163		$	10.00 - 17.20	$	10.59
Canceled	(12,575	)	10.00 - 17.20		11.87
Outstanding at December 31, 2004	4,588		$	10.00 - 10.50	$	10.34
Canceled	(3,013	)	10.24		10.24
Outstanding at December 31, 2005	1,575		$	10.50	$	10.34
Canceled	(1,575	)	10.50		10.34
Outstanding at December 31, 2006	—		$	—	$	—

Through December 31, 2005, the Bank applied APB Opinion No. 25 in accounting for stock options and, accordingly, no compensation expense was recognized in the consolidated financial statements at the date of the grant.  However, as a result of cancellations of stock options, which the Bank considers to be modifications to the terms of original grant, the Bank has recognized $22,000, $86,000 and $305,000 in 2006, 2005 and 2004, respectively as compensation expense.  These amounts reflect the cash paid to the optionee for the cancellation of the option.

There were no stock options granted in 2006, 2005 or 2004.  Therefore, no pro forma net income disclosure is required.

Earnings per Share - Basic earnings per share is based on the weighted average number of common shares outstanding while diluted earnings per share is based on the weighted average number of common shares outstanding and common share equivalents that would arise from the exercise of stock options.

The weighted average shares outstanding used to compute earnings per share were as follows:

		Years Ended December 31,
	2006	2005	2004
Basic Earnings per Share	3,441,383	3,440,596	3,440,596
Diluted Earnings per Share	3,442,323	3,441,568	3,437,481

The difference between the weighted average shares outstanding to compute basic earnings per share as compared to diluted earnings per share for 2006, 2005 and 2004, respectively resulted from the dilutive effect of stock options, if exercised.

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

Recent Accounting Pronouncements - - In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”. This statement amends FASB Statements No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. This statement resolves issues addressed in “Statement 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interest in Securitized Financial Assets”. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Bank is still evaluating the impact of SFAS No. 155 but does not expect that the guidance will have a material effect on the Bank’s financial position or results of operations.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets”, an amendment of FASB Statement No. 140. This statement addresses the recognition and measurement of separately recognized servicing rights.  The statement clarifies when a servicing right should be separately recognized, requires servicing rights to be initially measured at fair value, and allows an entity to choose to subsequently measure its servicing rights at fair value.  The Statement is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006.  The Bank does not expect that the guidance will have a material effect on the Bank’s financial position or results of operations.

In June 2006, the FASB issued FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”).  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  This guidance will not have a material effect on the Bank’s financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Bank is currently assessing the impact of this pronouncement.

In September 2006, the FASB issued SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires an employer to recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year, and recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes are reported in comprehensive income and as a separate component of stockholders’ equity.

On September 2006, the SEC staff published Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. SAB 108 addresses quantifying the financial statement effects of misstatements; specifically, how the effects of prior year uncorrected misstatements must be considered in quantifying misstatements in the current year financial statements. In addition, SAB 108 provides guidance on the correction of misstatements, including the correction of prior period financial statements for immaterial misstatements. Importantly, SAB 108 offers a “one-time” special transition provision for correcting certain prior year misstatements that were uncorrected as of the beginning of the fiscal year of adoption. SAB 108 is effective for fiscal years ending after November 15, 2006.  This guidance did not have an effect on the Bank’s financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities— including an amendment of FASB Statements No. 115” SFAS No. 159 permits entities to choose to

34

measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value.   This Statement is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007.   The Bank is currently assessing the impact of this pronouncement.  The EITF reached a consensus on EITF Issue No. 06-4, “The Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF 06-4”). EITF 06-4 addresses whether the postretirement benefit associated with an endorsement split-dollar life insurance arrangement is effectively settled in accordance with Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” and APB Opinion No. 12 “Omnibus Opinion—1967” upon entering into such an arrangement. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. The Bank is considering the impact, if any, that may result from the adoption of EITF 06-4.

The EITF reached a consensus on EITF Issue No. 06-5, “Accounting for Purchases of Life Insurance—Determining the Amount that Could be Realized in Accordance with FASB Technical Bulletin No. 85-4” (“EITF 06-5”). EITF 06-5 addresses (i) whether a policyholder should consider any additional amounts included in the contractual terms of the insurance policy other than the cash surrender value in determining the amount that could be realized under the insurance contract in accordance with Technical Bulletin 85-4, (ii) whether a policyholder should consider the contractual ability to surrender all of the individual-life policies (or certificates in a group policy) at the same time in determining the amount that could be realized under the insurance contract in accordance with Technical Bulletin 85-4 and (iii) whether the cash surrender value component of the amount that could be realized under the insurance contract in accordance with Technical Bulletin 85-4 “Accounting for Purchases of Life Insurance” should be discounted in accordance with APB Opinion No. 21 “Interest on Receivables and Payables”, when contractual limitations on the ability to surrender a policy exist. EITF 06-5 is effective for fiscal years beginning after December 15, 2006. The Bank believes the impact, as a result of adopting EITF 06-5 effective January 1, 2007, will not be material to our Consolidated Financial Statements.

3.  vestment Securities Available for Sale and Held to Maturity

The amortized cost, gross unrealized gains and losses, and the fair values of investment securities available for sale and held to maturity are shown below.  Where applicable, the maturity distribution and the fair value of investment securities, by contractual maturity, are shown.  Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	December 31, 2006
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Available for Sale
Obligations of U.S. Government agencies:
Due 1 year or less	$	2,000,000	—		$	(11,880	)	$	1,988,120
Due after 1 year through 5 years	12,989,613		$	7,642	(113,105		)	12,884,150
Due after 5 years through 10 years	1,000,000		—		(14,060		)	985,940
Mutual funds	20,001,827		—		(806,811		)	19,195,016
Total	$	35,991,440	$	7,642	$	(945,856	)	$	35,053,226

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	December 31, 2006
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Held to Maturity
Municipal Obligations:
Due after 1 year through 5 years	$	340,377	$	2,012	—			$	342,389
Due after 5 years through 10 years	3,601,806		54,320		$	(17,714	)	3,638,412
Due after 10 years	20,308,776		626,530		(27,794		)	20,907,790
Total	$	24,250,959	$	682,862	$	(45,508	)	$	24,888,591

	December 31, 2005
	Amortized		Gross Unrealized				Fair
	Cost		Gains	Losses			Value
Available for Sale
Obligations of U.S. Government agencies:
Due 1 year or less	$	7,000,000	—	$	(58,470	)	$	6,941,530
Due after 1 year through 5 years	12,985,929		—	(221,759		)	12,764,170
Due after 5 years through 10 years	4,986,181		—	(37,481		)	4,948,700
Mutual funds	20,001,827		—	(757,815		)	19,244,012
Total	$	44,973,937	—	$	(1,075,525	)	$	43,898,412

	December 31, 2005
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Held to Maturity
Municipal Obligations:
Due after 1 year through 5 years	$	339,986	—		$	(3,223	)	$	336,763
Due after 5 years through 10 years	2,065,829		$	2,340	(36,817		)	2,031,352
Due after 10 years	25,775,599		847,877		(13,916		)	26,609,560
Total	$	28,181,414	$	850,217	$	(53,956	)	$	28,977,675

Included in obligations of U.S. Government agencies at December 31, 2006 and December 31, 2005, were $11.9 and $18.0 million, respectively, of structured notes.   These structured notes were comprised of step-up bonds that provide the U.S. Government agency with the right, but not the obligation, to call the bonds on certain dates.

For the years ended December 31, 2006, 2005 and 2004, proceeds from sales of investment securities available for sale amounted to $1.0 million, $14.8 million and $5.0 million, respectively. For such periods, gross realized gains on sales amounted to $2,000, $12,000, and $19,000, respectively, while gross realized losses amounted to $0, $228,000 and $18,000, respectively. The tax provision applicable to the net realized gain (loss) amounted to $585, $73,000, and $250 for 2006, 2005, and 2004, respectively. Investment securities with an aggregate carrying value of $4.7 million and $6.8 million were pledged as collateral for certain deposits at December 31, 2006 and 2005, respectively.

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4.  Mortgage-Backed Securities Available for Sale

The amortized cost, gross unrealized gains and losses, and the fair values of mortgage-backed securities available for sale are as follows:

	December 31, 2006
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
GNMA pass-through certificates	$	4,461,810	$	24,822	$	(85,938	)	$	4,400,694
FHLMC pass-through certificates	13,422,268		14,517		(246,586		)	13,190,199
FNMA pass-through certificates	26,672,093		4,788		(632,068		)	26,044,813
Total	$	44,556,171	$	44,127	$	(964,592	)	$	43,635,706

	December 31, 2005
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
GNMA pass-through certificates	$	5,431,154	$	48,300	$	(107,067	)	$	5,372,387
FHLMC pass-through certificates	15,176,680		30,187		(293,559		)	14,913,308
FNMA pass-through certificates	28,634,765		31,692		(590,265		)	28,076,192
Total	$	49,242,599	$	110,179	$	(990,891	)	$	48,361,887

The collateralized mortgage obligations contain both fixed and adjustable classes of securities which are repaid in accordance with a predetermined priority period.  The underlying collateral of the securities are loans which are insured by FHLMC and FNMA.

At December 31, 2006 and 2005, the Bank had $2.9 million and $1.2 million, respectively, in mortgage-backed securities pledged as collateral for the treasury, tax and loan account and certain deposits.

5.     Loans Receivable - Net

Loans receivable consist of the following:

	December 31,
	2006			2005
Real estate loans:
Single-family	$	108,425,691		$	104,020,497
Multi-family	2,088,053			2,220,602
Commercial	108,338,566			105,687,316
Land and construction	11,773,746			7,395,885
Commercial business	5,484,638			4,745,470
Consumer and other loans	2,443,917			3,093,310
Total loans receivable	238,554,611			227,163,080
Less:
Unearned income	(74,160		)	(198,591		)
Allowance for loan losses	(2,719,418		)	(2,670,494		)
Loans receivable - net	$	235,761,033		$	224,293,995

The Bank originates loans to customers located primarily in Southeastern Pennsylvania. This geographic concentration of credit exposes the Bank to a higher degree of risk associated with this economic region. In addition, the Bank participates in the origination and sale of fixed-rate single-family residential mortgage loans in the secondary market. The Bank recognized gain on sale of loans from the sale of such loans of $14,529, $53,227, and $46,279 for the years ended December 31, 2006, 2005, and 2004, respectively.

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At December 31, 2006, 2005, and 2004, the Bank was servicing loans for others amounting to approximately $567,000, $577,000 and $587,000, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing. Loan servicing income is recorded upon receipt and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees.

The Bank originates and purchases both adjustable and fixed rate loans.  The adjustable rate loans have interest rate adjustment limitations and are generally indexed to the National Median Monthly Cost of Funds or U.S. Treasury securities plus a fixed margin.

At December 31, 2006, the composition of these loans was approximately as follows:

Fixed Rate		Adjustable Rate
Term to
Term to Maturity	Book Value	Rate Adjustment	Book Value
1 month to 1 year	$  3,438,565	1 month to 1 year	$  92,016,603
1 year to 3 years	9,938,013	1 year to 2 years	1,855,465
3 years to 5 years	13,477,657	3 years to 5 years	47,024,845
5 years to 15 years	63,809,876	5 years to 15 years	260,530
Over 15 years	6,733,056	Over 15 years	—
Total	$97,397,167		$141,157,443

At December 31, 2005, the composition of these loans was approximately as follows:

Fixed Rate		Adjustable Rate
Term to
Term to Maturity	Book Value	Rate Adjustment	Book Value
1 month to 1 year	$  1,413,354	1 month to 1 year	$  80,373,080
1 year to 3 years	7,954,773	1 year to 2 years	3,727,159
3 years to 5 years	11,907,313	3 years to 5 years	45,260,010
5 years to 15 years	68,983,662	5 years to 15 years	615,983
Over 15 years	6,927,746	Over 15 years	—
Total	$97,186,848		$129,976,232

Following is a summary of changes in the allowance for loan losses:

	December 31,
	2006			2005			2004
Balance, beginning of year	$	2,670,494		$	2,607,589		$	2,740,092
Provision charged to operations	60,000			120,000			210,000
Charge-offs	(13,644		)	(95,539		)	(508,077		)
Recoveries	2,568			38,444			165,574
Balance, end of year	$	2,719,418		$	2,670,494		$	2,607,589

Nonperforming loans amounted to $1.6 million and $1.9 million at December 31, 2006 and 2005, respectively.  Interest income that would have been recorded during 2006, 2005 and 2004, if the Bank’s nonperforming loans at the end of the year had been performing in accordance with their terms during the years 2006, 2005, 2004, was $66,000, $58,000 and $76,000, respectively.  The amount of interest income that was actually recorded during   2006, 2005 and 2004 with respect to such nonperforming loans amounted to approximately $1,000, $16,000 and $27,000, respectively.

38

At December 31, 2006 and 2005, 100% of impaired loan balances were measured for impairment based on the fair value of the loans’ collateral.

	December 31,
	2006		2005
Impaired loans without a valuation allowance	$	—	$	—
Impaired loans with a valuation allowance	$	—	$	221,970
Total impaired loans	$	—	$	221,970
Valuation allowance related to impaired loans	$	—	$	5,770

	Year Ended December 31,
	2006		2005		2004
Average impaired loans	$	188,191	$	105,336	$	377,640
Interest income recognized on impaired loans	5,391		4,362		8,050
Interest income recognized on a cash
basis on impaired loans	5,391		4,362		8,050

6.  Premises and Fixed Assets

Premises and fixed assets are summarized by major classifications as follows:

	December 31,
	2006			2005
Land and buildings	$	3,722,218		$	3,473,830
Furniture and fixtures	5,319,444			5,036,979
Total	9,041,662			8,510,809
Accumulated depreciation	(5,898,422		)	(5,366,766		)
Net	$	3,143,240		$	3,144,043

Depreciation expense for the years ended December 31, 2006, 2005 and 2004 amounted to $646,000, $643,000 and $594,000, respectively.

7.     Deposits

Deposits consist of the following major classifications:

	December 31,
	2006				2005
	Amount		Percent		Amount		Percent
Money market deposit accounts	$	24,254,727	7.3	%	$	23,836,872	8.0	%
Other savings deposits	43,511,509		13.0		54,869,062		18.4
Certificates of less than $100,000	165,607,301		49.6		146,610,049		49.2
Certificates of $100,000 or more	34,620,648		10.4		20,970,302		7.0
NOW accounts	43,859,691		13.1		33,335,128		11.2
Non-interest bearing accounts	21,948,062		6.6		18,088,585		6.1
Total	$	333,801,938	100.0	%	$	297,709,998	100.0	%

39

The weighted average cost of deposits was 3.37% and 2.66 % at December 31, 2006, and 2005, respectively.

A summary of certificates by scheduled maturity was as follows:

	December 31, 2006
	Amount		Percent
1 year or less	$	176,872,949	88.4	%
1 year through 3 years	14,272,000		7.1	%
Thereafter	9,083,000		0.5	%
Total	$	200,227,949	100.0	%

A summary of interest expense on deposits was as follows:

	Year Ended December 31,
	2006		2005		2004
Money market deposit accounts	$	386,516	$	258,072	$	218,248
Other savings deposits	366,626		439,850		477,526
Certificates of less than $100,000	5,817,646		4,019,637		3,234,756
Certificates of $100,000 or more	949,366		512,227		355,325
NOW accounts	829,879		436,664		71,331
Total	$	8,350,033	$	5,666,450	$	4,357,186

8.  FHLB Advances

FHLB Advances were summarized as follows:

		Interest		December 31,
	Due	Rate		2006		2005
FHLB advance	12/01/07	6.00	%	$	171,882	$	182,427
FHLB convertible advance	01/22/08	5.46		—		10,000,000
FHLB convertible advance	12/26/06	5.88		—		5,000,000
FHLB convertible advance	07/22/09	6.19		5,000,000		5,000,000
FHLB convertible advance	02/03/10	6.05		6,000,000		6,000,000
FHLB convertible advance	05/17/10	6.44		11,000,000		11,000,000
FHLB convertible advance	06/28/10	6.44		10,000,000		10,000,000
FHLB convertible advance	09/22/10	6.10		5,000,000		5,000,000
Total				$	37,171,882	$	52,182,427

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

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

The Bank’s unused credit line with the FHLB amounted to approximately $20,000,000 at both December 31, 2006 and 2005, respectively.  The weighted average rate on FHLB advances was 6.30% and 6.10% at December 31, 2006 and 2005, respectively.  The advances are collateralized by FHLB stock owned by the Bank in addition to a blanket pledge of eligible assets in an amount required to be maintained so that the estimated fair value of such eligible assets exceeds, at all times, 110% of the outstanding advances.

40

The following table sets forth certain information regarding borrowed funds at or for the dates indicated:

	At or for the Year Ended December 31,
	2006			2005
	(Dollars in Thousands)
FHLB of Pittsburgh advances:
Average balance outstanding	$	47,684		$	52,823
Maximum amount outstanding at any month-end during the year	52,182			56,192
Balance outstanding at end of year	37,173			52,182
Weighted average interest rate during the year	6.21		%	6.12		%
Weighted average interest rate at end of period	6.30		%	6.10		%
Total borrowings:
Average balance outstanding	$	47,990		$	53,116
Maximum amount outstanding at any month-end during the year	52,474			56,464
Balance outstanding at end of year	37,210			53,116
Weighted average interest rate during the year	6.21		%	6.10		%
Weighted average interest rate at end of year	6.29		%	6.08		%

9.     Income Taxes

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

Retained earnings at both December 31, 2006 and 2005 included approximately $7.1 million, representing bad debt deductions for which no deferred income taxes have been provided.

From time to time, the Company may be subject to examination by various tax authorities in jurisdictions in which the Company has its business operations. The Company regularly assesses the likelihood of additional assessments in each of the tax jurisdictions resulting from these examinations. Tax reserves have been established, which the Company believes to be adequate in relation to the potential for additional assessments. Once established, reserves are adjusted as information becomes available or when an event requiring a change to the reserve occurs. The resolution of tax matters could have an impact on the Company’s effective tax rate.

41

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

	December 31,
	2006			2005
Depreciation and amortization	$	(65,620	)	$	(149,600	)
Deferred loan fees	(98,260		)	(111,860		)
Allowance for loan losses	924,460			907,460
Additional minimum liability for retirement plans	743,602			319,460
Net unrealized loss (gain) on securities available for sale	631,951			665,120
Supplemental retirement benefits	906,100			737,800
Alternative minimum tax	888,000			698,000
Other	(50,680		)	51,200
Total	$	3,879,553		$	3,117,580

The consolidated provision (benefit) for income taxes consisted of the following for the years ended December 31:

	2006			2005			2004
Current	$	304,000		$	249,000		$	577,000
Deferred	(371,000		)	(406,000		)	(248,000		)
Total	$	(67,000	)	$	(157,000	)	$	329,000

The Bank’s federal income tax expense differs from that computed at the statutory tax rate as follows:

	Year Ended December 31,
	2006					2005					2004
				Percentage										Percentage
				of Pretax					Percentage					of Pretax
	Amount			Income		Amount			Income		Amount			Income
Expense at statutory rate	$	443,246		34.0	%	$	345,721		34.0	%	$	832,353		34.0	%
Adjustments resulting from:
Tax-exempt income	(415,766		)	(31.9	)	(457,610		)	(45.0	)	(458,147		)	(18.7	)
Increase in cash surrender value	(123,518		)	(9.5	)	(117,373		)	(11.5	)	(122,172		)	(5.0	)
Other	29,038			2.2		72,262			7.1		76,966			3.1
Income tax expense (benefit) per consolidated statements of income	$	(67,000	)	(5.2	)%	$	(157,000	)	(15.4	)%	$	329,000		13.4	%

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10.  Commitments and Contingencies

The Bank had approximately $11.2 million and $7.7 million in outstanding loan commitments, excluding unused lines of credit and the undisbursed portion of loans in process, at December 31, 2006 and 2005, respectively, which were expected to fund within the next three months.  In addition, the Bank had $296,000 and $291,000 in standby letters of credit at December 31, 2006 and 2005, respectively, which were secured by cash, marketable securities and real estate.  All commitments are issued using the Bank’s current loan policies and underwriting guidelines and the breakdown between fixed-rate and adjustable-rate loans is as follows:

	December 31,
	2006		2005
Fixed-rate (ranging from 5.625% to 8.00%)	$	1,314,000	$	2,754,350
Adjustable-rate	9,929,600		4,948,904
Total	$	11,243,600	$	7,703,254

Depending on cash flow, interest rate risk, risk management and other considerations, longer term fixed-rate residential loans are sold in the secondary market.  There was $125,000 in outstanding commitments to sell loans at December 31, 2006.

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

Expenses related to premises and fixed assets for 2006, 2005, and 2004 were $1.9 million, $1.8 million, and $1.6 million, respectively.  The Bank maintains offices at nine locations, including seven bank offices which it rents under leases expiring over the next 17 years.  The following is a summary of future minimum rental payments required under all operating leases as of December 31, 2007:

	Year Ending December 31,
2007	$	424,364
2008	433,140
2009	363,866
2010	298,266
2011	256,054
Thereafter	1,340,460
Total minimum rental payments	$	3,116,150

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11.  Retirement Plans

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

Pension expense was $599,397, $841,356, and $361,730 in 2006, 2005 and 2004, respectively.  The contribution for the profit-sharing plan was $100,000, $92,000, and $110,000 in 2006, 2005 and 2004, respectively.  There were no employer contributions to the 401(k) plan in 2006, 2005 and 2004.

The Bank has adopted the provisions of SFAS 158 related to recognition of the funded status of defined benefit plans as of December 31, 2006.  The following table discloses the effect on the Consolidated Statements of Financial Condition of adopting such provisions of SFAS 158:

	Before						After
	Adoption of						Adoption of
	SFAS 158			Adjustment			SFAS 158
Deferred tax asset	$	3,358,553		$	521,000		$	3,879,553
Prepaid expenses and other assets	1,968,468			(332,719		)	1,635,749
Total assets	410,161,537			188,281			410,349,818
Accrued expenses and other liabilities	4,638,425			1,199,634			5,838,059
Accumulated other comprehensive loss	(1,658,836		)	(1,011,353		)	(2,670,189		)
Total stockholders’ equity	34,511,319			(1,011,353		)	33,499,966

The net pension costs for the years ended December 31, 2006, 2005 and 2004 included the following components:

	2006			2005			2004
Net Periodic Benefit Cost
Service Cost	$	321,698		$	339,639		$	274,593
Interest Cost	262,712			338,593			281,061
Expected Return on Plan Assets	(299,447		)	(363,924		)	(261,990		)
Amortization of Transition Obligation/(Asset)	3,496			3,496			3,496
Amortization of Prior Service Cost	12,685			12,685			12,685
Amortization of (Gain)/Loss	60,353			94,940			51,885
Net Periodic Benefit Cost (NPBC)	361,497			425,429			361,730
SFAS 88 Settlement	237,900			415,927			—
Net Periodic Benefit Cost	$	599,397		$	841,356		$	361,730
Key Assumptions
Discount Rate for Net Periodic Benefit Cost	5.75		%	5.75		%	5.75		%
Salary Scale for Net Periodic Benefit Cost	4.00		%	3.50		%	3.50		%
Expected Return on Plan Assets	8.00		%	8.00		%	8.00		%
Discount Rate for Disclosure Obligations	5.75		%	5.75		%	5.75		%
Salary Scale for Disclosure Obligations	4.00		%	3.50		%	3.50		%

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

	2006			2005
Change in Projected Benefit Obligation
Projected Benefit Obligation at Beginning of Year	$	4,788,582		$	5,444,476
Service Cost	321,698			339,639
Interest Cost	262,712			338,593
Settlements	(800,220		)	(1,428,900		)
Disbursements	(60,144		)	(390,301		)
Actuarial (Gain)/Loss	(177,834		)	485,075
Projected Benefit Obligation at End of Year	$	4,334,794		$	4,788,582
Change in Plan Assets During Year
Fair Value of Plan Assets at Beginning of Year	$	3,251,601		$	3,923,368
Return on Plan Assets	430,087			214,492
Contributions paid by Employer	800,000			800,000
Settlements	(821,080		)	(1,295,958		)
Benefits Paid	(60,144		)	(390,301		)
Fair Value of Plan Assets at End of Year	$	3,600,464		$	3,251,601
Benefit obligations at end of year
Accumulated Benefit Obligation (ABO)	$	3,087,187		$	3,312,090
Projected Benefit Obligation (PBO)	4,334,794			4,788,582
Funded status
Projected Benefit Obligation (PBO)	$	(4,334,794	)	$	(4,788,582	)
Fair Value of Plan Assets	3,600,464			3,251,601
Funded Status at End of Year	$	(734,330	)	$	(1,536,981	)
Amounts recognized in the statement of financial position
Other liabilities	$	(734,330	)	$	(60,489	)
Amounts recognized in accumulated other comprehensive loss
Net loss	$	913,073		*
Prior service cost	152,222			*
Transition obligation	1,754			*
Total	$	1,067,049		*
Other changes in plan assets and benefit obligations recognized in other comprehensive income
Net loss/(gain)	$	(525,514	)	*
Amortization of net loss	(60,353		)	*
Amortization of prior service cost	(12,685		)	*
Amortization of transition obligation	(3,496		)	*
Total recognized in other comprehensive loss	$	(602,048	)	*
Total recognized in net periodic benefit cost and other comprehensive loss	$	(2,651	)	*

The estimated net loss, prior service cost, and transition obligation for the defined benefit pension plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $36,196, $12,685, and $1,754, respectively.

* Not applicable due to adoption of SFAS No. 158 on December 31, 2006.

45

Expected Contributions to the Trust

The Bank plans to contribute $500,000 to the Pension Plan in 2007.

Expected Benefit Payments From the Trust

2007	$	82,302
2008	122,392
2009	177,254
2010	176,140
2011	177,701
2012-2016	1,150,971

Asset allocation for the pension plan includes equity securities ranging from 55% to 75%, debt securities ranging from 25% to 45% and cash and cash equivalents ranging from 0% to 10%.  The following table shows the asset allocation as of December 31, 2006.

			Percentage
Investment Class			of Assets
Equity Investments	$	2,604,719	72.3	%
Debt Investments	832,052		23.1	%
Other	163,693		4.6	%
Fair Value as of December 31, 2006	$	3,600,464	100.0	%

In July 2000, the Bank entered into a Nonqualified Retirement and Death Benefit Agreement (the “Agreement”) with certain officers of the Bank.  The purpose of the Agreement is to provide the officers with supplemental retirement benefits equal to a specified percentage of final composition and a pre-retirement death benefit if the officer does not attain the specific age requirement.   A summary of the reconciliation and disclosure information required under SFAS No. 158 for the Agreement is as follows:

	December 31,
	2006			2005
Change in benefit obligation during year
Benefit obligation at beginning of year	$	3,694,146		$	3,331,817
Service cost	32,543			30,774
Interest cost	207,808			201,489
Benefit payments	(152,128		)	(77,708		)
Actuarial loss	2,130			207,775
Benefit obligation at end of year	$	3,784,500		$	3,694,146
Change in plan assets during year
Fair value of plan assets at beginning of year	$	-0-		$	-0-
Employer contributions	152,128			77,708
Benefit payments	(152,128		)	(77,708		)
Fair value of plan assets at end of year	$	-0-		$	-0-

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	December 31,
	2006			2005
Funded status
Funded status	$	(3,784,500	)	$	(3,694,146	)
Unrecognized net loss	654,720			746,982
Unrecognized prior service cost	465,304			697,956
Net liability recognized in earnings	$	(2,664,476	)	$	(2,249,208	)
Change in other comprehensive income
Other Comprehensive Income at beginning of year	$	746,982		$	638,234
Net Change in Other Comprehensive Income	373,042			108,748
Other Comprehensive Income at end of year	$	1,120,024		$	746,982
Expected cash-flow information for year after current fiscal year
Expected employer contributions	$	153,510		$	158,792
2007	153,510			158,792
2008	160,177			158,792
2009	160,177			158,792
2010	160,177			167,814
2011	169,199			267,053
2012-2016	902,961			—

	2006			2005			2004
Net periodic benefit cost
Service cost	$	32,543		$	30,774		$	21,857
Interest cost	207,808			201,489			187,497
Amortization of prior service cost	232,652			232,652			232,652
Amortization of net (gain) or loss	94,392			99,027			—
Net periodic benefit cost	$	567,395		$	563,942		$	442,006
Discount Rate	5.75		%	5.75		%	5.75		%

12.          Regulatory Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.  Qualitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).  Management believes, as of December 31, 2006, that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2006, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table.  There are no conditions or events since that notification that management believes have changed the Bank’s category.

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

									To Be Well
									Capitalized Under
					For Capital Adequacy				Prompt Corrective
	Actual				Purposes				Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2006:	(Dollars in Thousands)
Tier 1 Capital	$	34,193	8.61	%	$	15,882	4.00	%	$	19,852	5.00	%
(to average assets)
Tier 1 Capital	34,193		13.48		10,148		4.00		15,222		6.00
(to risk-weighted assets)
Total Capital	36,912		14.55		20,296		8.00		25,370		10.00
(to risk-weighted assets)
As of December 31, 2005:
Tier 1 Capital	$	34,918	9.02	%	$	15,480	4.00	%	$	19,350	5.00	%
(to average assets)
Tier 1 Capital	34,918		14.92		9,364		4.00		14,046		6.00
(to risk-weighted assets)
Total Capital	37,588		16.06		18,728		8.00		23,410		10.00
(to risk-weighted assets)

The Bank’s capital at December 31, 2006 and 2005 for financial statement purposes differs from Tier 1 capital amounts by $693,000 and $791,000, respectively, representing the exclusion for regulatory purposes of unrealized gains and losses on securities available for sale.

13. Related Party Transactions

The Bank maintains a lease agreement with the Holding Company for one of its office locations. The initial lease term expires in September 2015 and the Bank has paid $42,000 each year for the years ended December 31, 2006, 2005, 2004.  In addition, the Bank maintains a management fee agreement with the Holding Company which provides for the sharing of certain company related expenses.  Such expenses include salaries and benefits, insurance expenses, professional fees and directors fees.  The Bank has received management fees amounting to $480,000, $456,000 and $420,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

14. Fair Value of Financial Instruments

Financial instruments include such items as loans, deposits, securities and other instruments.

Fair value estimates are generally subjective in nature and are dependent on a number of significant assumptions associated with each instrument or group of similar instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows and relevant available market information. Fair value information is intended to represent an estimate of an amount at which a financial instrument could be exchanged in a current transaction established trading markets for a significant portion of the Bank’s financial instruments, the Bank may not be able to immediately settle its financial instruments; as such, the fair values are not necessarily indicative of the amounts that could be realized through immediate settlement. In addition, the majority of the Bank’s financial instruments, such as loans and deposits, are held to maturity and are realized or paid according to the contractual agreement with the customer.

Where available, quoted market prices should be used to estimate fair values. However, due to the nature of the Bank’s financial instruments, in many instances quoted market prices are not available. Accordingly, the Bank has estimated fair value based on other valuation techniques permitted by the standard, such as discounting estimated future cash flows using a rate commensurate with the risks involved or other acceptable methods. Fair values are required to be estimated without regard to any premium or discount that may result from concentrations of ownership

48

of a financial instrument, possible income tax ramifications or estimated transaction costs. Fair values are also estimated at a specific point in time and are based on interest rate and other assumptions at that date. As the assumptions underlying these estimates change, the fair values of financial instruments will change. The aggregate fair value amounts presented do not purport to represent and should not be considered to be representative of the underlying “market” or franchise value of the Bank.

The methods and assumptions used to estimate the fair values of each class of financial instruments are as follows:

Cash and Cash Equivalents - - These items are generally short-term in nature and, accordingly, the carrying amounts reported in the balance sheet are reasonable approximations of their fair values.

Investment and Mortgage-Backed Securities - Fair values for investment and mortgage-backed securities are based on quoted market prices.

Loans Receivable - - The fair value was estimated by discounting approximate cash flow of the portfolio to achieve a current market yield. Consideration was given to prepayment speeds, economic conditions, risk characteristics and other factors considered appropriate.

Loans Held for Sale — Fair values of mortgage loans held for sale are based on commitments on hand from investors of prevailing market rates.

FHLB Stock — The carrying value of FHLB stock approximates fair value based on redemption provisions of the FHLB.

Deposits and FHLB Advances and Other Borrowed Money - As required by the standard, the fair values of deposits subject to immediate withdrawal, such as interest and noninterest checking, passbook savings and money market demand deposit accounts, are equal to their carrying amounts in the accompanying statement of financial condition. Fair values for time deposits and FHLB advances and other borrowed money are estimated by discounting future cash flows using interest rates currently offered on these instruments with similar remaining maturities.

Off-Balance-Sheet Instruments - - Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter similar agreements, taking into account the running terms of the agreements and counterparties’ credit standing.

49

The estimated fair value of the Bank’s financial instruments at December 31, 2006, and 2005 is as follows:

	2006				2005
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
	(In thousands)				(In thousands)
Assets:
Cash and cash equivalents	$	3,106	$	3,106	$	19,053	$	19,053
Interest bearing deposits at banks	45,177		45,177		1,903		1,903
Investment securities	59,304		59,942		72,080		72,876
Mortgage-backed securities	43,636		43,636		48,362		48,362
Loans receivable	235,761		234,545		224,294		225,028
Loans held for sale	125		125		—		—
FHLB stock	2,549		2,549		2,738		2,738
Liabilities:
NOW and MMDA deposits (1)	$	90,062	$	90,092	$	75,261	$	75,261
Other savings deposits	43,512		43,512		54,869		54,869
Certificate accounts	200,228		199,086		167,580		166,098
FHLB advances & other borrowed money	37,172		38,716		52,182		55,217

(1)Includes non-interest bearing accounts

15.  Quarterly Financial Data (Unaudited)

The following table presents unaudited quarterly financial data for the years ended December 31, 2006 and 2005.

(Dollars in thousands, except per share amounts)

	2006											2005
	4th Q			3rd Q		2nd Q			1st Q			4th Q		3rd Q			2nd Q			1st Q
Interest income	$	5,732		$	5,521	$	5,310		$	5,189		$	5,069	$	5,011		$	4,987		$	4,816
Interest expense	3,199			2,852		2,727			2,553			2,424		2,255			2,164			2,064
Net interest income	2,533			2,669		2,583			2,636			2,645		2,756			2,823			2,752
Provision for loan losses	15			15		15			15			30		30			30			30
Net interest income after provision for loan losses	2,518			2,654		2,568			2,621			2,615		2,726			2,793			2,722
Other income	344			327		369			412			374		332			123			304
Other expenses	2,658			2,533		2,657			2,661			2,557		2,755			3,008			2,652
Income (loss) before income taxes	204			448		280			372			432		303			(92		)	374
Income tax expense (benefit)	(50		)	30		(37		)	(10		)	18		(24		)	(154		)	3
Net income	$	254		$	418	$	317		$	382		$	414	$	327		$	62		$	371
Basic earnings per share	$	0.07		$	0.12	$	0.09		$	0.11		$	0.11	$	0.10		$	0.02		$	0.11
Diluted earnings per share	$	0.07		$	0.12	$	0.09		$	0.11		$	0.11	$	0.10		$	0.02		$	0.11

* * * *

50

Corporate Information

Independent Registered Public Accounting Firm	Investor Information
Deloitte & Touche LLP	Investors, analysts and others seeking financial
1700 Market Street	information may contact:
Philadelphia, PA 19103-3984	Kathleen P. Lynch
(215)246-2300	Corporate Secretary
	541 Lawrence Road
Market Makers	Broomall, PA 19008-3599
FTN Midwest Securities Corp	(610)353-2900
Sandler O’ Neill & Partners, L.P.
Oppenheimer & Co.	Transfer Agent
Ryan Beck & Co.	Direct questions regarding dividend checks, address and name changes or lost certificates to:
	Registrar and Transfer Company
Securities Counsel	10 Commerce Drive
Elias, Matz, Tiernan & Herrick L.L.P.	Cranford, NJ 07016
734 15th Street, NW, 12th Floor
12th Floor Washington, D.C. 20005 (202)347-0300	Upon request Alliance Bancorp Annual Report on Form 10-K for the year ended December 31, 2006, required to be filed with the Securities and Exchange Commission will be furnished without charge to any stockholder, or may be viewed on our web site at allianceanytime.com.

Market Information

As of January 30, 2007 Alliance Bancorp Common Stock is traded in the Nasdaq Global Market and quoted under the symbol “ALLB”.    The prices shown below reflect the prices reported by the Nasdaq system prior to the reorganization.  The closing price on December 31, 2006 was $22.60 per share.  There were 7,225,000 shares outstanding as of January 30, 2006, comprised of 3,973,750 shares held by Alliance Mutual Holding Company and 3,251,250 shares held by approximately 1,000 stockholders.

For the Quarter Ended	High		Low		Close		Cash Dividends Declared
December 31, 2006	$	24.95	$	22.22	$	22.60	$	.09
September 30, 2006	25.50		21.50		24.95		.09
June 30, 2006	26.99		24.00		25.50		.09
March 31, 2006	27.00		24.71		24.98		.09
December 31, 2005	$	27.70	$	25.00	$	26.39	$	.09
September 30, 2005	27.00		21.61		27.00		.09
June 30, 2005	29.08		21.69		22.75		.09
March 31, 2005	39.04		28.30		29.03		.09

51

EX-31.1

EXHIBIT 31.1

PURSUANT TO RULES 13a-14 AND 15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934 AND
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

                I, Dennis D. Cirucci, certify that:

1.I have reviewed this annual report on Form 10-K of Alliance Bancorp, Inc, of Pennsylvania (the “Registrant”);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: March 30, 2007	/s/ Dennis D. Cirucci
	Dennis D. Cirucci
	President and
	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

PURSUANT TO RULES 13a-14 AND 15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934 AND
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

I, Peter J. Meier, certify that:

1.I have reviewed this annual report on Form 10-K of Alliance Bancorp, Inc, of Pennsylvania (the “Registrant”);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented  in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: March 30, 2007	/s/ Peter J. Meier
	Peter J. Meier
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

The undersigned executive officer of Alliance Bancorp, Inc, of Pennsylvania (the “Registrant”), hereby certifies that the Registrant’s Form 10-K for the year ended December 31, 2006 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Date: March 30, 2007	/s/ Dennis D. Cirucci
	Dennis D. Cirucci
	President and
	Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

The undersigned executive officer of Alliance Bancorp, Inc, of Pennsylvania (the “Registrant”), hereby certifies that the Registrant’s Form 10-K for the year ended December 31, 2006 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Date: March 30, 2007	/s/ Peter J. Meier
	Peter J. Meier
	Chief Financial Officer