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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2009

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)

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

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

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

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

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

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

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

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

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

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

As of June 30, 2009, the aggregate value of the 2,896,525 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 354,725 shares held by all directors and officers of the Registrant and the Registrant’s Employee Stock Ownership Plan (“ESOP”) as a group, and treasury shares was approximately $20.5 million.  This figure is based on the last trade price of $8.53 per share of the Registrant’s Common Stock on June 30, 2009.  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 5, 2010, was 6,709,676.

DOCUMENTS INCORPORATED BY REFERENCE

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

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PART I

Item 1.  Business

General

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

Alliance Bank operates 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, 2009, we had $464.2 million of total assets, $378.3 million of total deposits and stockholders’ equity of $48.4 million.

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

Market Area and Competition

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

Delaware and Chester Counties have a large, well-educated, and skilled labor force, with nearly one quarter of the counties’ population having earned a four-year college degree. In addition, Philadelphia’s central location in the Northeast corridor, infrastructure, and other factors have made the Bank’s primary market area attractive to many large corporate employers, including Comcast, Boeing, State Farm Insurance, United Parcel Service, PECO Energy, SAP America, Inc. and Wawa.

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

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

We face strong competition, both in attracting deposits and making real estate and commercial loans. Our most direct competition for deposits has historically come from other savings banks, credit unions, and commercial banks located in our market area. This includes many large regional financial institutions and internet banks which have even greater financial and marketing resources available to them. The ability of the Bank to attract and retain core deposits depends on its ability to provide a competitive rate of return, liquidity, and service convenience comparable to those offered by competing investment opportunities. The Bank’s management remains focused on attracting core deposits through its branch network, business development efforts, and commercial business relationships.

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Lending Activities

General.  At December 31, 2009, the Bank’s total portfolio of loans receivable amounted to $288.7 million, or 62.2%, of the Bank’s $464.2 million of total assets at such time.  Prior to 1996 the Bank traditionally concentrated its lending activities on first mortgage loans secured by residential property.  However, over the past fourteen 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 $131.9 million or 45.7% of the total loan portfolio at December 31, 2009 while single family residential mortgage loans amounted to $115.0 million or 39.8% of the total loan portfolio.  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, 2009, such loan categories amounted to $1.2 million, $24.6 million, $7.6 million and $8.4 million, respectively, or 0.4%, 8.5%, 2.6% and 2.9% 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, 2009, the Bank’s commercial real estate loans increased by $8.4 million or 6.8% to $131.9 million. For the year ended December 31, 2009, the Bank’s single-family mortgage loans decreased by $1.7 million or 1.5% to $115.0 million.

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

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Contractual Maturities.  The following table sets forth the scheduled contractual maturities of the Bank’s loans receivable at December 31, 2009.  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.

(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.

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.

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

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

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

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

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

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

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

The Bank’s single-family loan originations amounted to $12.2 million and $24.5 million during 2009 and 2008, respectively.  When possible, the Bank emphasizes the origination of single-family residential adjustable-rate mortgage loans (“ARMs”).  During 2009 and 2008, $3.1 million and $10.3 million single family residential loans originated had adjustable rates, 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 $-0- million and $1.4 million of long-term (generally over 15 years) fixed-rate residential loans during 2009 and 2008, respectively.  Such loan sales were conducted in furtherance of the Bank’s asset/liability strategies. At December 31, 2009 and December 31, 2008, there were no loans held for sale.

In accordance with the Bank’s increased emphasis on commercial real estate loan originations, such originations amounted to $37.9 million and $26.9 million during 2009 and 2008, respectively.  In addition, land and construction loan originations amounted to $6.7 million and $11.1 million during 2009 and 2008, respectively.

Since 1999, the Bank has provided single-family residential loan products to borrowers that did not meet the underwriting criteria of the Federal Home Loan Mortgage Corporation (‘FHLMC”) and the Federal National Mortgage Association (“FNMA”) and where the borrower’s credit score is below 660.  The Bank recognizes that these loans, which are considered subprime loans, have additional risk factors as compared to typical single-family residential lending.  These loans are generally not saleable in the secondary market due to the credit risk characteristics of the borrower, the underlying documentation, the loan-to-value ratio, or the size of the loan, among other factors.  At December 31, 2009 and 2008, the Bank’s single-family loan portfolio included $21.9 million or 19.1% and $24.1 million or 20.6%, respectively, of such subprime loans.  The Bank reported $53,000 or 0.1% and $1.9 million or 7.9% of these loans as non-performing at December 31, 2009 and December 31, 2008, 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.

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Historically, the Bank has not been an active purchaser of loans.  The Bank purchased $4.0 million and $6.5 million during 2009 and 2008, respectively, of real estate loans, some of which are located outside of its primary lending area.  As of December 31, 2009, the outstanding balance of such loans included $3.9 million of residential construction loans and $9.1 million in commercial real estate loans.  At December 31, 2009, none of these loans were reported as non-performing.

Single-Family Residential Real Estate Loans.  The Bank has historically concentrated its lending activities on the origination of loans secured primarily by first mortgage liens on existing single-family residences and intends to continue to originate permanent loans secured by first mortgage liens on single-family residential properties in the future. At December 31, 2009, $115.0 million or 39.8% of the Bank’s total loan portfolio consisted of single-family residential real estate loans.  Of the $115.0 million of such loans at December 31, 2009, $69.2 million or 60.2% had adjustable rates of interest and $45.8 million or 39.8% had fixed rates of interest.

The Bank’s ARMs typically provide for an interest rate which 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 200 basis points per year, with a limit of 600 basis points over the life of the loan.    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 loans 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 resulting in a decrease in the spread between the rates offered on fixed and adjustable rate loans.

Adjustable-rate loans decrease the risks to the Bank that are 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.

The Bank has continued to originate a limited amount of fixed-rate mortgage loans with terms up to 30 years. The majority 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, 2009, the Bank held a first lien on a majority of the properties securing home equity loans from the Bank.   At December 31, 2009, home equity loans and lines amounted to $21.4 million or 7.4% of the total loan portfolio, which are included in single family loans.

The Bank is permitted to lend up to 100% of the appraised value of the real property securing a residential loan; however, if the amount of a residential loan originated or refinanced exceeds 90% of the appraised value, the Bank is required by federal regulations to obtain private mortgage insurance on the portion of the principal amount that exceeds 80% of the appraised value of the security property.  Pursuant to underwriting guidelines adopted by the Board of Directors, the Bank may lend up to an 80% loan-to-value ratio without private mortgage insurance unless it is determined that additional collateral in the form of private mortgage insurance or other acceptable collateral is needed.  The Bank may lend up to a 90% loan-to-value ratio on a one or two family owner-occupied residential property as long as additional collateral in the form of private mortgage insurance or other acceptable collateral enhancements are obtained. Exceptions to this policy may be made to assist in the Bank’s community outreach efforts if deemed prudent by the Bank’s Management and with additional collateral enhancements to reduce the risk inherent in the loan(s).

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, 2009, $1.2 million or 0.4% of the Bank’s total loan portfolio consisted of loans secured by existing multi-family residential real estate.  Commercial real estate loans increased from $123.5 million or 43.8% of the total loan portfolio at December 31, 2008 to $131.9 million or 45.7% of the total loan portfolio at December 31, 2009. Such increase was due to the Bank’s strategy to increase such lending.  The Bank intends to

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continue to place an increased emphasis on this type of lending.

The majority of the Bank’s multi-family residential loans are secured primarily by five to fifteen unit apartment buildings, while the Bank’s commercial real estate loans are primarily secured by office buildings, hotels, small retail establishments, restaurants and other facilities.  These types of properties constitute the majority of the Bank’s commercial real estate loan portfolio.  The majority of the multi-family residential and commercial real estate loan portfolio at December 31, 2009 was secured by properties located in the Bank’s primary market area.  The five largest loan relationships at December 31, 2009 amounted to $6.5 million, $6.3 million, $6.0 million, $5.8 million and $5.6 million, respectively, all of which were performing in accordance 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% of appraised value at the time the loan is granted.  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 1.15.  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, 2009, the Bank had no non-performing multi-family loans and 13 non-performing commercial real estate loans which amounted to $1.8 million.

Construction Loans.  The Bank also originates residential and commercial construction loans, and to a limited degree, land acquisition and development loans.  Construction loans are classified as either residential construction loans or commercial real estate construction loans at the time of origination, depending on the nature of the property securing the loan.  The Bank’s construction lending activities generally are limited to the Bank’s primary market area.  At December 31, 2009, construction loans amounted to $24.6 million or 8.5% of the Bank’s total loan portfolio, which consisted of $12.3 million of residential and $12.3 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 successful application, credit review and analysis of personal and corporate financial statements, the Bank will grant local builders lines of credit up to designated amounts.  These loans may be used for the purpose of constructing model homes, including a limited number for inventory.  In some instances, lines of credit will also be granted for purposes of acquiring improved lots or the purchase of construction in process and developing of speculative properties thereon.  Once approved for a construction loan or credit line, a developer submits a progress report and a request for payment.  Generally, the Bank makes payments under the stage of completion method.  Prior to making payment, the Bank inspects all construction sites and verifies that the work being submitted for payments has been performed.

The Bank’s commercial construction loans are generally made to local developers and others for the purpose of developing commercial real estate properties such as small office buildings and hotels, storage facilities and commercial building renovations.  The application, credit review and disbursement process are similar to those mentioned above for the Bank’s residential construction loans.   The five largest real estate construction loans had outstanding balances of $6.0 million, $3.7 million, $2.9 million, $2.0 million, and $1.7 million as of December 31, 2009.  The $6.0 million loan is a land and development loan for a mixed use commercial real estate project located in Bradenton, Florida, and was classified as special mention at December 31, 2009.  The $3.7 million loan was restructured in December of 2009, which management considers to be a troubled debt restructuring, and was classified as non-performing as of December 31, 2009.  The $2.9 million and $1.7 million loans are residential construction projects located in Philadelphia, Pennsylvania and are both classified as special mention due to slower than anticipated sales.  The $2.0 million loan is a performing commercial construction loan in Philadelphia..

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.  The Bank utilizes interest rate floors on all commercial loans and lines of credit whenever possible.

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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 number of units built to two or three sample units plus any under agreement of sale and 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, 2009, the Bank had one non-performing construction loan which had an outstanding balance of $3.7 million.  In December 2009, this loan was restructured and management considers this a troubled debt restructuring.

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 $7.6 million or 2.6% of the total loan portfolio at December 31, 2009.  Student loans amounted to $7.1 million or 2.5% of the total loan portfolio at December 31, 2009.  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 $482,000 or 0.2% of the total loan portfolio at December 31, 2009.  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 collateral.  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.  At December 31, 2009, there were 60 non-performing student loans which amounted to $153,000, compared to 22 non-performing student loans which amounted to $75,000 at December 31, 2008.

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 $8.5 million or 2.9% of the total loan portfolio at December 31, 2009 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.  At December 31, 2009, the Bank had 4 non-performing commercial business loans which amounted $472,000.

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.

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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 $138,000 at December 31, 2009 compared to $492,000 at December 31, 2008. 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 (OREO) until sold and is initially recorded at the fair value at the date of acquisition.   After the date of acquisition, all costs incurred in maintaining the property are expensed and costs incurred for the improvement or development of such property are capitalized up to the extent of their fair value.  As of December 31, 2009, the Bank had approximately $3.0 million in OREO.  The $3.0 million consists of one commercial property in the amount of $651,000, three improved building lots totaling $930,000, one unimproved lot in the amount of $38,000, and four single family residences totaling $1.4 million.  All of the properties are located within the Banks market area except one of the single family residences which is located in Tampa, Florida with a carrying value of $49,000.

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

Delinquent Loans.  The following table sets forth information concerning delinquent loans at December 31, 2009, 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.

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

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

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

Classified Assets.  Federal regulations require that each insured savings association classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them.  There are three regulatory 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 have a weakness but do not currently expose an insured institution to a sufficient degree of risk to warrant classification as substandard, doubtful or loss.

At December 31, 2009, the Bank had $20.3 million of classified assets, of which $12.6 million consisted of loans classified as special mention, $7.7 million consisted of loans classified as substandard, and no loans classified as doubtful.  The $12.6 million of loans classified as special mention consisted of $787,000 in commercial real estate loans and $11.8 million in real estate construction loans.  The $11.8 million includes four residential real estate construction loans to three borrowers amounting to $4.2 million and two commercial real estate construction loans amounting to $7.6 million at December 31, 2009.  All of these loans are located in the Bank’s primary market except for one mixed use commercial real estate project located in Bradenton, Florida, which have been classified as special mention primarily due to slower than anticipated sales.  The $7.7 million of loans designated as substandard consisted of $1.7 million of single-family real estate loans, $1.5 million in commercial real estate loans, $3.7 million in construction real estate, and $472,000 in commercial business loans.  The $3.7 million real estate construction loan represents 16 remaining substantially completed residential condominium units located in center city Philadelphia and was restructured in December of 2009,  which management considers to be a troubled debt restructuring.  The Company does not knowingly lend to subprime borrowers, except as disclosed in “Origination, Purchase and Sale of Loans”, and has not been materially directly impacted by the current subprime crisis as of December 31, 2009.

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.

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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.

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