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

Overview

Alliance Bancorp, Inc. of Pennsylvania is a bank holding company which own 100% of the capital stock of Alliance Bank ("Bank") which is a community oriented savings bank headquartered in Broomall, Pennsylvania. We operate a total of nine banking offices located in Delaware and Chester Counties, which are suburbs of Philadelphia. Our primary business consists of attracting deposits from the general public and using those funds, together with funds we borrow, to originate loans to our customers and invest in securities such as U.S. Government and agency securities, mortgage-backed securities and municipal obligations. At December 31, 2008, we had $424.1 million of total assets, $331.7 million of total deposits and stockholders' equity of $48.9 million.

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

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

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

Certain highlights of our operating strategy are:

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

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

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

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

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

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

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

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

Other than Temporary Impairment of Securities. The Company is required to perform periodic reviews of individual securities in its investment portfolio to determine whether a decline in the fair value of a security is other than temporary. A review of other than temporary impairment requires management to make certain judgments regarding the nature of the decline, its effect on the financial statements and the probability, extent and timing of a valuation recovery and the Company's intent and ability to hold the security. Management evaluates securities for other than temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluations. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. If the decline in the market value of a security is determined to be other than temporary we would recognize the decline as a realized loss on the income statement.

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

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

interest income on prime based loans and overnight deposits almost immediately, while the impact on interest expense on customer deposits is more gradual due to fixed term certificates of deposit and the highly competitive environment in which the Company operates. The Company anticipates that the current falling rate environment will continue to put downward pressure on short term interest rates. This decreasing interest rate environment has resulted in pricing pressure on the Bank's deposit accounts as it attracts new customers and retains existing customers.

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

Critical Accounting Policies

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

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

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

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

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

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

Other than Temporary Impairment of Securities. The Company is required to perform periodic reviews of individual securities in its investment portfolio to determine whether a decline in the fair value of a security is other than temporary. A review of other-than-temporary impairment requires the Company to make certain judgments regarding the nature of the decline, its effect on the financial statements and the probability, extent and timing of a valuation recovery and the Company's intent and ability to hold the security. Management evaluates securities for other than temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluations. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. If the decline in the market value of a security is determined to be other than temporary we would recognize the decline as a realized loss on the income statement.

Financial Condition

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

Total liabilities increased $2.2 million or 0.6% to $375.2 million at December 31, 2008, compared to $373.0 million at December 31, 2007. This increase was primarily due to an increase of $4.1 million or 1.3% in interest bearing deposits. The increase was partially offset by a $3.2 million or 19.2% decrease in non interest-bearing deposits. Stockholders' equity decreased $2.6 million or 5.0% to $48.9 million as of December 31, 2008 compared to $51.5 million at December 31, 2007. Beginning January 31, 2008, the Company commenced a stock repurchase program and has repurchased 267,324 shares of common stock at an average price of $8.93 per share, which decreased stockholders' equity by $2.4 million.

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

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

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

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

Results of Operations

General. The Bank recorded net income of $605,000 for the year ended December 31, 2008 as compared to net income of $1.1 million in 2007. Net interest income increased $500,000 for the year ended December 31, 2008, compared to 2007, primarily due to a $2.3 million decrease in interest expense as a result of decreasing interest rates paid on deposits during 2008. During 2008, the Federal Reserve Board reduced the key short-term rate seven times from 4.25% at December 31, 2007 to a range of 0% to 0.25% at December 31, 2008. Other income decreased $243,000 or 50.2% for the year ended December 31, 2008, compared to 2007. This decrease is primarily attributable to a $157,000 loss on sale of investment securities. Other expenses increased by $495,000 or 5.1% for the year ended December 31, 2008, compared to 2007. This increase is primarily due to increases in salaries and employee benefits expense and an increase in advertising and marketing when comparing 2008 to 2007. The increase in salaries and employee benefits was attributed to a higher level of staff members and annual increases in employees' salaries. The increase in advertising and marketing was attributed to the Company's focus on cable television, media and newspaper advertising to increase the Banks visibility. The provision for loan losses increased $465,000 primarily due to increases in loans receivable and nonperforming loans. For 2008, the Company recorded a $411,000 income tax benefit compared to a $157,000 tax benefit for 2007. The income tax benefit increased due to a lower amount of pretax income for the year ended December 31, 2008, compared to 2007.

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

                            At
                         Dec. 31,                                        Year Ended December 31,
                           2008                  2008                              2007                             2006
                          Yield/     Average                 Yield/    Average                Yield/    Average                Yield/
(Dollars in Thousands)     Rate      Balance     Interest     Rate     Balance    Interest     Rate     Balance    Interest     Rate
Interest-earning
assets:
Loans receivable
(1) (2)                      6.20 % $  271,859   $  17,485     6.43 % $ 247,157   $  16,966     6.86 % $ 232,520   $  15,534     6.68 %
Mortgage-backed
securities                   4.80       32,531       1,493     4.59      39,660       1,816     4.58      47,342       2,184     4.61
Investment securities
(4)                          5.11       59,568       2,852     4.79      64,983       3,333     5.13      70,927       3,219     4.54
Other interest-earning
assets                       0.39       36,021         712     1.98      46,200       2,225     4.82      18,532         815     4.40
Total interest-earning
assets                       5.61      399,979      22,542     5.64     398,000      24,340     6.12     369,321      21,752     5.89
Noninterest-earning
assets                                  23,028                           22,741                           20,942
Total assets                        $  423,007                        $ 420,741                        $ 390,263

Interest-bearing
liabilities:
Deposits                     2.42   $  314,457       9,331     2.97   $ 310,112      11,618     3.75   $ 285,768       8,350     2.92
. . .