UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2013

OR

¨      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.: 000-54246

ALLIANCE BANCORP, INC. OF PENNSYLVANIA

(Exact name of registrant as specified in its charter)

Pennsylvania	56-2637804
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification Number)

541 Lawrence Road
Broomall, Pennsylvania	19008
(Address)	(Zip Code)

(610) 353-2900

(Registrant's telephone number, including area code)

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

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

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

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

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

The number of shares outstanding of Common Stock, par value $0.01 per share, of the Registrant as of November 1, 2013, was 4,899,204.

ALLIANCE BANCORP, INC. OF PENNSYLVANIA

Index

		PAGE
Part I – Financial Information
Item 1.	Financial Statements
	Unaudited Consolidated Statements of Financial Condition as of September 30, 2013 and December 31, 2012	3
	Unaudited Consolidated Statements of Income For the Three and Nine Months Ended September 30, 2013 and 2012	4
	Unaudited Consolidated Statements of Comprehensive Income For the Three and Nine Months Ended September 30, 2013 and 2012	5
	Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2013 and 2012.	6
	Unaudited Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2013 and 2012	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	49
Item 4.	Controls and Procedures	49
Part II – Other Information
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults Upon Senior Securities	50
Item 4.	Mine Safety Disclosures	50
Item 5.	Other Information	50
Item 6.	Exhibits	51
	Signatures	52

2

Part I – Item 1.

Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

Consolidated Statements of Financial Condition (Unaudited)

(Dollar amounts in thousands, except per share data)

	September 30,		December 31,
	2013		2012
Assets
Cash and cash due from depository institutions	$	1,137	$	984
Interest bearing deposits with depository institutions		61,865		111,321
Total cash and cash equivalents		63,002		112,305
Investment securities available for sale		25,540		9,000
Mortgage-backed securities available for sale		5,215		7,524
Investment securities held to maturity     (fair value - 2013, $27,944; 2012, $26,525)		27,762		25,325
Loans receivable - net of allowance for loan     losses - 2013, $4,504; 2012, $4,919		286,879		278,876
Accrued interest receivable		1,546		1,502
Premises and equipment – net		2,439		2,688
Other real estate owned (OREO)		3,023		2,092
Federal Home Loan Bank (FHLB) stock-at cost		647		1,338
Bank owned life insurance		12,379		12,155
Deferred tax asset – net		6,292		6,051
Prepaid expenses and other assets		1,319		2,059
Total Assets	$	436,043	$	460,915
Liabilities and Stockholders’ Equity
Liabilities
Non-interest bearing deposits	$	14,508	$	16,243
Interest bearing deposits		334,607		354,794
Total deposits		349,115		371,037
Other borrowings		3,536		3,261
Accrued expenses and other liabilities		6,757		6,615
Total Liabilities		359,408		380,913
Stockholders’ Equity
Common stock, $.01 par value; shares authorized – 50,000,000;     shares issued - 5,474,437; shares outstanding -     2013, 4,917,004; 2012, 5,201,734		55		55
Additional paid-in capital		56,467		56,343
Retained earnings		32,896		32,273
Common stock acquired by benefit plans		(3,111)		(3,562)
Accumulated other comprehensive loss		(2,110)		(1,675)
Treasury stock, at cost: 2013, 557,433 shares; 2012, 272,703 shares		(7,562)		(3,432)
Total Stockholders’ Equity		76,635		80,002
Total Liabilities and Stockholders’ Equity	$	436,043	$	460,915

See notes to unaudited consolidated financial statements.

3

Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

Consolidated Statements of Income (Unaudited)

(Dollar amounts in thousands, except per share data)

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2013		2012		2013		2012
Interest and Dividend Income
Loans, including fees	$	3,837	$	3,934	$	11,367	$	11,806
Mortgage-backed securities		53		86		182		291
Investment securities:
Taxable		40		53		91		194
Tax – exempt		205		268		620		722
Dividends		2		—		4		1
Balances due from depository institutions		46		63		165		187
Total interest and dividend income		4,183		4,404		12,429		13,201
Interest Expense
Deposits		604		773		1,890		2,486
Other borrowings		1		1		4		6
Total interest expense		605		774		1,894		2,492
Net Interest Income		3,578		3,630		10,535		10,709
Provision for Loan Losses		150		225		450		975
Net Interest Income After Provision for Loan Losses		3,428		3,405		10,085		9,734
Other Income
Service charges on deposit accounts		63		65		190		188
Other fee income		44		49		144		154
Gain on sale of premises and equipment		—		—		—		806
(Loss) gain on sale of OREO, net		(1)		125		(2)		326
Rental income from OREO		—		—		—		29
Increase in cash surrender value of bank owned life insurance		73		76		224		236
Other		—		—		—		1
Total other income		179		315		556		1,740
Other Expenses
Salaries and employee benefits		1,711		1,697		5,195		5,062
Occupancy and equipment		471		444		1,401		1,367
FDIC deposit insurance premiums		78		104		230		299
Advertising and marketing		116		124		319		348
Professional fees		186		147		579		472
Loan and OREO expense		29		54		83		189
Provision for OREO		—		—		106		—
Directors’ fees		57		61		172		178
Other		266		287		843		834
Total other expenses		2,914		2,918		8,928		8,749
Income Before Income Tax Expense		693		802		1,713		2,725
Income Tax Expense		160		162		326		618
Net Income	$	533	$	640	$	1,387	$	2,107
Basic Earnings per Share	$	0.11	$	0.12	$	0.28	$	0.40
Dilutive Earnings per Share	$	0.11	$	0.12	$	0.28	$	0.40

See notes to unaudited consolidated financial statements.

4

Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollar amounts in thousands)

	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2013		2012		2013		2012
Net Income	$	533	$	640	$	1,387	$	2,107
Other Comprehensive Loss
Unrealized loss on available for sale securities      net of tax benefit 2013, $39 and $224; 2012,      $21 and $61		(76)		(41)		(435)		(118)
Comprehensive Income	$	457	$	599	$	952	$	1,989

See notes to unaudited consolidated financial statements.

5

 

Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(Dollar amounts in thousands, except per share data)

							Common
							Stock		Accumulated
			Additional				Acquired		Other				Total
	Common		Paid-in		Retained		by Benefit		Comprehensive		Treasury		Stockholders’
	Stock		Capital		Earnings		Plans		Loss		Stock		Equity
Balance, January 1, 2012	$	55	$	56,175	$	30,819	$	(2,706)	$	(1,348)	$	—	$	82,995
ESOP shares committed to be released								116						116
Net income						2,107								2,107
Dividends declared ($0.15 per share)						(821)								(821)
Stock-based compensation (stock options)				121										121
Stock-based compensation (restricted stock)				333										333
Common stock acquired by 2011 RRP Trust (122,477 shares)								(1,455)						(1,455)
Acquisition of treasury stock (135,103 shares)												(1,688)		(1,688)
Other comprehensive loss										(118)				(118)
Balance, September 30, 2012	$	55	$	56,296	$	32,105	$	(3,712)	$	(1,466)	$	(1,688)	$	81,590
Balance, January 1, 2013	$	55	$	56,343	$	32,273	$	(3,562)	$	(1,675)	$	(3,432)	$	80,002
ESOP shares committed to be released								115						115
Net income						1,387								1,387
Dividends declared ($0.15 per share)						(764)								(764)
Stock-based compensation (stock options)				124										124
Stock-based compensation (restricted stock)				336										336
Acquisition of treasury stock (284,730 shares)												(4,130)		(4,130)
Other comprehensive loss										(435)				(435)
Balance, September 30, 2013	$	55	$	56,467	$	32,896	$	(3,111)	$	(2,110)	$	(7,562)	$	76,635

See notes to unaudited consolidated financial statements.

6

 

Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(Dollar amounts in thousands)

	For the Nine Months
	Ended September 30,
	2013		2012
Cash Flow From Operating Activities
Net income	$	1,387	$	2,107
Adjustments to reconcile net income to cash provided by    operating activities:
Provision for:
Loan losses		450		975
Depreciation and amortization		437		384
Write-down of OREO		106		—
Stock based compensation		575		570
Gain on sale of premises and equipment		—		(806)
Loss (gain) on the sale of OREO		2		(326)
Deferred tax (benefit) expense		(17)		454
Increase in cash surrender value of bank owned life insurance		(224)		(236)
Changes in assets and liabilities which provided (used) cash:
Accrued expenses and other liabilities		142		7
Prepaid expenses and other assets		740		298
Accrued interest receivable		(44)		81
Net cash provided by operating activities		3,554		3,508
Cash Flow From Investing Activities
Purchase of investment securities-available for sale		(25,000)		(14,000)
Purchase of investment securities-held to maturity		(4,275)		(6,425)
Loans originated and acquired		(54,742)		(49,043)
Proceeds from maturities and calls of investment securities		9,838		24,132
Redemption of FHLB stock		691		347
Principal repayments of:
Loans		44,360		52,629
Mortgage-backed securities		2,110		2,803
Purchase of premises and equipment		(188)		(732)
Proceeds from the sale of premises and equipment		—		2,853
Improvements in OREO		—		(486)
Proceeds from the sale of OREO		890		2,748
Net cash (used in) provided by investing activities		(26,316)		14,826
Cash Flow From Financing Activities
Dividends paid		(764)		(821)
Decrease in deposits		(21,922)		(2,601)
Purchase of treasury stock		(4,130)		(1,688)
Acquisition of stock by benefit plans		—		(1,455)
Increase (decrease) in other borrowings		275		(758)
Net cash used in financing activities		(26,541)		(7,323)
(Decrease) increase in Cash and Cash Equivalents		(49,303)		11,011
Cash and Cash Equivalents, Beginning of Year		112,305		95,852
Cash and Cash Equivalents, End of Year	$	63,002	$	106,863
Supplemental Disclosures of Cash Flow Information-
Cash paid during the period for:
Interest	$	1,895	$	2,498
Income taxes	$	—	$	—
Supplemental Schedule of Noncash Financing and Investing Activities:
Other real estate acquired in settlement of loans	$	1,929	$	4,442

See notes to unaudited consolidated financial statements.

7

 

ALLIANCE BANCORP, INC OF PENNSYLVANIA AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(1) Organization and Basis of Presentation

On January 18, 2011, Alliance Mutual Holding Company and Alliance Bancorp, Inc. of Pennsylvania, the federally chartered mid-tier holding company for Alliance Bank (the “Bank”) completed a reorganization and conversion (the “second step conversion”), pursuant to which Alliance Bancorp, Inc. of Pennsylvania, a new Pennsylvania corporation (“Alliance Bancorp” or the “Company”), acquired all the issued and outstanding shares of the Bank’s common stock. In connection with the second step conversion, 3,258,475 shares of common stock, par value $0.01 per share, of Alliance Bancorp were sold in subscription, community and syndicated community offerings to certain depositors of the Bank and other investors for $10 per share, or $32.6 million in the aggregate (the “Offering”), and 2,215,962 shares of common stock were issued in exchange for the outstanding shares of common stock of the mid-tier holding company, which also was known as Alliance Bancorp, Inc. of Pennsylvania, held by the “public” shareholders of the mid-tier holding company. Each share of common stock of the mid-tier holding company was converted into the right to receive 0.8200 shares of common stock of Alliance Bancorp in the second step conversion. As a result of the second step conversion, the former mutual holding company and the mid-tier company were merged into Alliance Bancorp and 548,524 (pre-conversion) treasury shares were canceled. Additionally, the Bank’s Employee Stock Ownership Plan (“ESOP”) was issued a line of credit for up to $1.9 million, which it used to purchase 50,991 shares of common stock in the Offering and 100,000 additional shares of common stock in the open market following the Offering.

The Bank is a community oriented savings bank headquartered in Broomall, Pennsylvania. The Bank operates a total of eight banking offices located in Delaware and Chester Counties, which are suburbs of Philadelphia. The Bank is primarily engaged in attracting deposits from the general public through its branch offices and using such deposits primarily to (i) originate and purchase loans secured by first liens on single-family (one-to-four units) residential and commercial real estate properties and (ii) invest in securities issued by the U.S. Government and agencies thereof, municipal and corporate debt securities and certain mutual funds. The Bank derives its income principally from interest earned on loans, mortgage-backed securities and investments and, to a lesser extent, from fees received in connection with the origination of loans and for other services. The Bank's primary expenses are interest expense on deposits and borrowings and general operating expenses.

The Bank is subject to regulation by the Pennsylvania Department of Banking and Securities (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. As a registered savings and loan holding company, the Company is supervised by the Board of Governors of the Federal Reserve System (“FRB”).

8

Basis of Presentation. The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). The consolidated statement of financial condition at December 31, 2012, has been derived from audited consolidated financial statements but does not include all information and notes required by US GAAP for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring adjustments or accruals, which are necessary for a fair presentation of the consolidated financial statements, have been included. The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the results which may be expected for the year ending December 31, 2013 or any other period. All significant intercompany accounts and transactions have been eliminated. For comparative purposes, prior periods’ consolidated financial statements have been reclassified when necessary to conform to report classifications of the current year. The reclassifications had no effect on net income. The unaudited consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Subsequent Events. The Company has evaluated events and transactions occurring subsequent to September 30, 2013, for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

(2) Recent Accounting Pronouncements

In February 2013, the FASB issued ASU No. 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date”. The ASU requires the measurement of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement with its co-obligors as well as any additional amount that the entity expects to pay on behalf of its co-obligors. The new standard is effective retrospectively for fiscal years and interim periods within those years, beginning after December 15, 2013, and early adoption is permitted. The Company is currently evaluating the implications of ASU 2013-04.

(3) Segment Information

The Company has no reportable segments. All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, lending is dependent upon the ability of the Company to fund itself with deposits and other borrowings and manage interest rate and credit risk.

(4) Earnings Per Share

Earnings per share (“EPS”) consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed based on the weighted average number of shares of common stock outstanding for each period presented. Diluted EPS is calculated based on the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of shares that are assumed to have been purchased with the proceeds from the exercise of stock options, as well as unvested common stock awards. Common stock equivalents which are considered antidilutive are not included for the purposes of this calculation. There were 9,500 and 290,250 anti-dilutive stock options outstanding at September 30, 2013 and September 30, 2012, respectively.

9

The following table sets forth the composition of the weighted average shares (denominator) used in the basic and dilutive earnings per share computations.

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2013		2012		2013		2012
Net Income	$	533,000	$	640,000	$	1,387,000	$	2,107,000
Weighted average shares outstanding		4,995,496		5,431,911		5,112,008		5,460,104
Adjusted average unearned ESOP shares		(153,893)		(166,956)		(157,378)		(170,792)
Weighted average shares outstanding – basic		4,841,603		5,264,955		4,954,630		5,289,312
Effect of dilutive common stock equivalents		109,858		31,741		78,495		35,784
Adjusted weighted average shares outstanding-dilutive		4,951,461		5,296,696		5,033,125		5,325,096
Basic earnings per share	$	0.11	$	0.12	$	0.28	$	0.40
Dilutive earnings per share	$	0.11	$	0.12	$	0.28	$	0.40

(5) Employee Stock Ownership Plan

The Bank has an Employee Stock Ownership Plan (“ESOP”) for the benefit of employees who meet the eligibility requirements as defined in the ESOP. The ESOP purchased 74,073 shares of common stock in the offering completed on January 30, 2007 using proceeds of a loan from the former mid-tier holding company. The Bank makes quarterly payments of principal and interest over a term of 8 years at a rate of 8.25% to the Company. The ESOP has a second loan from the Company to fund the purchase of 150,991 additional shares in connection with the second step conversion completed on January 18, 2011 under which the Bank makes quarterly payments of principal and interest over a term of 20 years at a rate of 3.25% to the Company. The loans are secured by the shares of the stock purchased.

As the debt is repaid, shares are released from collateral and allocated to qualified employees. As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. The compensation expense for the ESOP for the three months ended September 30, 2013 and September 30, 2012 was $38,000 and $38,000, respectively. The compensation expense for the ESOP for the nine months ended September 30, 2013 and September 30, 2012 was $115,000 and $115,000, respectively.

The following table presents the components of the ESOP shares inclusive of shares purchased prior to 2007:

	September 30, 2013		September 30, 2012
Shares released for allocation		169,370		155,430
Unearned shares		152,161		166,101
Total ESOP shares		321,531		321,531

10

 

(6) Retirement Plans

The Bank has a defined benefit pension plan which covers all full-time employees meeting certain eligibility requirements. The net pension costs included the following components:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2013		2012		2013		2012
Net Periodic Benefit Cost
Service Cost	$	72,065	$	73,153	$	216,195	$	219,459
Interest Cost		59,165		59,083		177,495		177,249
Expected Return on Plan Assets		(85,962)		(100,313)		(296,886)		(300,939)
Amortization of Prior Service Cost		3,171		3,171		9,513		9,513
Amortization of Loss		34,811		33,594		104,433		100,782
Net Periodic Benefit Cost	$	83,250	$	68,688	$	210,750	$	206,064

The Bank has 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 compensation and a pre-retirement death benefit if the officer does not attain the specific age requirement. A summary of the interim information for the Agreement is as follows:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2013		2012		2013		2012
Net Periodic Benefit Cost
Service Cost	$	13,705	$	12,060	$	41,115	$	36,180
Interest Cost		49,611		43,214		148,833		129,642
Amortization of Loss		8,684		4,726		26,052		14,178
Net Periodic Benefit Cost	$	72,000	$	60,000	$	216,000	$	180,000

(7) Fair Value Accounting

FASB ASC Topic 820, Fair Value Measurement, establishes a fair value hierarchy that prioritizes the inputs to validation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of fair value hierarchy under FASB ASC Topic 820 are as follows:

Level 1:	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2:	Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3:	Prices or valuation techniques that require inputs that are both significant to fair value measurement and unobservable (i.e. support with little or no market value activity).

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

11

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

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

Investment and Mortgage-Backed Securities. The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.

Loans Receivable (Carried at Cost). The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans (Level 3). Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Impaired Loans (Generally Carried at Fair Value). Impaired loans are those in which the Bank has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. Appraised values may be discounted based upon management’s historical knowledge and changes in the market conditions from the time of the appraisal. Because of the high degree of judgment required in estimating the fair value of collateral underlying impaired loans, and because of the relationship between fair value and general economic conditions, the Company considers fair values of impaired loans to be highly sensitive to market conditions. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances, net of any valuation allowance. At September 30, 2013 and December 31, 2012, the fair value consists of loan balances of $6.7 million and $11.9 million, respectively, net of valuation allowances of $773,000 and $1.2 million, respectively.

Other Real Estate Owned. OREO assets are originally recorded at fair value upon transfer of the loans to OREO. Subsequently, OREO assets are carried at the lower of carrying value or fair value. The fair value of OREO is based on independent appraisals less selling costs. Appraised values may be discounted based upon management’s historical knowledge and changes in the market conditions from the time of the appraisal. Because of the high degree of judgment required in estimating the fair value of OREO and because of the relationship between fair value and general economic conditions, the Company considers fair values of OREO to be highly sensitive to market conditions. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. At September 30, 2013 and December 31, 2012, the fair value consists of OREO balances of $1.5 million and $2.2 million, respectively, net of valuation allowances of $405,000 and $313,000, respectively.

12

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

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

Deposits (Carried at Cost). The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts) (Level 1). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits (Level 3).

Other Borrowings (Carried at Cost). The carrying amount of overnight sweep accounts generally approximate fair value.

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

The following table summarizes assets measured at fair value on a recurring basis as of September 30, 2013, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

Description	Total		(Level 1)  Prices in Active  Markets for Identical Assets		(Level 2) Significant  Other  Observable  Inputs		(Level 3)  Significant Unobservable Inputs
Obligations of FHLB	$	16,642	$	—	$	16,642	$	—
Obligations of Freddie Mac		1,003		—		1,003		—
Obligations of Fannie Mae		7,895		—		7,895		—
Obligations of GNMA		1,229		—		1,229		—
Obligations of FHLMC		1,453		—		1,453		—
Obligations of FNMA		2,533		—		2,533		—
Total	$	30,755	$	—	$	30,755	$	—

13

 

The following table summarizes assets measured at fair value on a recurring basis as of December 31, 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

Description		Total		(Level 1) Prices in Active Markets for Identical Assets			(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
Obligations of FHLB	$	3,997	$	—		$	3,997	$	—
Obligations of Fannie Mae		5,003		—			5,003		—
Obligations of GNMA		1,390		—			1,390		—
Obligations of FHLMC		2,247		—			2,247		—
Obligations of FNMA		3,887		—			3,887		—
Total	$	16,524	$	—	$		16,524	$	—

For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2013 are as follows (in thousands):

Description	Total		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
Impaired loans	$	5,897	$	—	$	—	$	5,897
Other real estate owned		1,094		—		—		1,094
Total	$	6,991	$	—	$	—	$	6,991

The following table presents quantitative information with regards to Level 3 fair value measurements at September 30, 2013 (in thousands):

Description	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
Impaired loans	$	5,897	Appraisal of collateral	Appraisal adjustments (1)	0%to -50% (-21%)
Other real estate owned		1,094	Appraisal of collateral	Appraisal adjustments (1)	0% to -15% (-3%)
Total	$	6,991

(1) Appraisals may be adjusted by management for qualitative factors, including estimated liquidation expenses. The range and weighted average adjustments are presented as a percentage of the appraisal.

14

The following table presents quantitative information with regards to Level 3 fair value measurements at December 31, 2012 (in thousands):

Description	Total		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
Impaired loans	$	10,605	$	—	$	—	$	10,605
Other real estate owned		1,851		—		—		1,851
Total	$	12,456	$	—	$	—	$	12,456

For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2012 are as follows (in thousands):

Description	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
Impaired loans	$	10,605	Appraisal of collateral	Appraisal adjustments (1)	-3% to -30% (-14%)
Other real estate owned		1,851	Appraisal of collateral	Appraisal adjustments (1)	-7% to -20% (-20%)
Total	$	12,456

________________

(1)  Appraisals may be adjusted by management for qualitative factors, including estimated liquidation expenses. The range and weighted average adjustments are presented as a percentage of the appraisal.

There were no transfers between levels for the three and nine months ended September 30, 2013. The Company’s policy is to recognize transfers between levels as of the end of the reporting period.

15

The carrying amount and estimated fair values of the Company’s assets and liabilities were as follows.

	At September 30, 2013
	Carrying		Level 1		Level 2		Level 3
	Amount		Fair Value		Fair Value		Fair Value
	(In thousands)
Assets:
Cash and due from banks	$	1,137	$	1,137	$	—	$	—
Interest bearing deposits at banks		61,865		61,865		—		—
Investment securities		53,302		—		53,484		—
Mortgage-backed securities		5,215		—		5,215		—
Loans receivable		286,879		—		—		288,251
FHLB stock		647		—		647		—
Accrued interest receivable		1,546		—		1,546		—
Liabilities:
NOW and MMDA deposits (1)	$	94,822	$	94,822	$	—	$	—
Other savings deposits		51,479		51,479		—		—
Certificate accounts		202,814		—		—		202,905
Other borrowings		3,536		3,536		—		—
Accrued interest payable		8		—		8		—
Off balance sheet instruments		—		—		—		—

________________

(1) Includes non-interest bearing accounts, totaling $14,508.

	At December 31, 2012
	Carrying		Level 1		Level 2		Level 3
	Amount		Fair Value		Fair Value		Fair Value
	(In thousands)
Assets:
Cash and due from banks	$	984	$	984	$	—	$	—
Interest bearing deposits at banks		111,321		111,321		—		—
Investment securities		34,325		—		35,525		—
Mortgage-backed securities		7,524		—		7,524		—
Loans receivable		278,876		—		—		281,111
FHLB stock		1,338		—		1,338		—
Accrued interest receivable		1,502		—		1,502		—
Liabilities:
NOW and MMDA deposits (1)	$	98,693	$	98,693	$	—	$	—
Other savings deposits		50,284		50,284		—		—
Certificate accounts		222,060		—		—		233,400
Other borrowings		3,261		3,261		—		—
Accrued interest payable		9		—		9		—
Off balance sheet instruments		—		—		—		—

________________

(1) Includes non-interest bearing accounts, totaling $16,243.

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(8) 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 accumulated other comprehensive income (loss) until realized.

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

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

	At September 30, 2013
	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(Dollars in Thousands)
Securities Available for Sale
U.S. Government obligations	$	19,532	$	468	$	—	$	—	$	19,532	$	468
Securities Held to Maturity
Municipal obligations	$	10,485	$	250	$	—	$	—	$	10,485	$	250

	At December 31, 2012
	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(Dollars in Thousands)
Securities Available for Sale
U.S. Government obligations	$	1,996	$	4	$	—	$	—	$	1,996	$	4
Mortgage-backed securities		3		—		—		—		3		—
Total securities available for sale	$	1,999	$	4	$	—	$	—	$	1,999	$	4
Securities Held to Maturity
Municipal obligations	$	1,719	$	5	$	—	$	—	$	1,719	$	5

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

As of September 30, 2013, management believes that the estimated fair value of the securities disclosed above is primarily dependent upon the movement in market interest rates particularly given the negligible inherent credit risk associated with the issuers of these securities.

Although the fair value will fluctuate as market interest rates move, management believes that these fair values will recover as the underlying portfolios mature. As of September 30, 2013, there were 13 U.S. government obligations in an unrealized loss position, no mortgage-backed securities were in an unrealized loss position, and 14 municipal obligations were in an unrealized loss position. There were no securities in an unrealized loss position for more than twelve months as of September 30, 2013. The Company does not intend to sell any of these securities and it is unlikely that it will be required to sell any of these securities before recovery. Management does not believe any individual unrealized loss as of September 30, 2013 represents an other-than-temporary impairment.

Securities Available for Sale and Held to Maturity

The amortized cost, gross unrealized gains and losses, and the fair values of securities available for sale and held to maturity are shown below. Where applicable, the maturity distribution and the fair value of 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.

Dollars in Thousands
	September 30, 2013
	Amortized		Gross Unrealized				Fair
Available for Sale:	Cost		Gains		Losses		Value
Obligations of the Federal Home Loan Bank:
Due after 1 years through 5 years	$	4,000	$	3	$	(1)	$	4,002
Due after 5 years through 10 years		9,000		1		(233)		8,768
Due after 10 years		4,000		—		(128)		3,872
Total	$	17,000	$	4	$	(362)	$	16,642

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	September 30, 2013
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
Obligations of Freddie Mac:
Due after 1 year through 5 years	$	1,000	$	3	$	—	$	1,003
Total	$	1,000	$	3	$	—	$	1,003

	September 30, 2013
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
Obligations of Fannie Mae:
Due after 1 year through 5 years	$	5,000	$	1	$	(22)	$	4,979
Due after 10 years		3,000		—		(84)		2,916
Total	$	8,000	$	1	$	(106)	$	7,895

 

	September 30, 2013
	Amortized		Gross Unrealized				Fair
Held to Maturity	Cost		Gains		Losses		Value
Municipal Obligations:
Due in 1 year or less	$	196	$	—	$	—	$	196
Due after 1 year through 5 years		5,964		33		(16)		5,981
Due after 5 years through 10 years		6,075		31		(124)		5,982
Due after 10 years		15,527		368		(110)		15,785
Total	$	27,762	$	432	$	(250)	$	27,944

 

	December 31, 2012
	Amortized		Gross Unrealized				Fair
Available for Sale:	Cost		Gains		Losses		Value
Obligations of the Federal Home Loan Bank:
Due after 5 years through 10 years	$	4,000	$	1	$	(4)	$	3,997
Total	$	4,000	$	1	$	(4)	$	3,997

	December 31, 2012
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
Obligations of Fannie Mae:
Due after 1 year through 5 years	$	3,000	$	2	$	—	$	3,002
Due after 10 years		2,000		1		—		2,001
Total	$	5,000	$	3	$	—	$	5,003

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	December 31, 2012
	Amortized		Gross Unrealized				Fair
Held to Maturity	Cost		Gains		Losses		Value
Municipal Obligations:
Due in 1 year or less	$	190	$	—	$	—	$	190
Due after 1 year through 5 years		2,994		53		(2)		3,045
Due after 5 years through 10 years		4,894		108		—		5,002
Due after 10 years		17,247		1,044		(3)		18,288
Total	$	25,325	$	1,205	$	(5)	$	26,525

Included in obligations of U.S. Government agencies at September 30, 2013 and December 31, 2012, were $25.6 million and $9.0 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. There were no sales of investment securities in 2013 or 2012.

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:

Dollars in Thousands

	September 30, 2013
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
GNMA pass-through certificates	$	1,151	$	78	$	—	$	1,229
FHLMC pass-through certificates		1,349		104		—		1,453
FNMA pass-through certificates		2,403		130		—		2,533
Total	$	4,903	$	312	$	—	$	5,215

	December 31, 2012
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
GNMA pass-through certificates	$	1,287	$	103	$	—	$	1,390
FHLMC pass-through certificates		2,086		161		—		2,247
FNMA pass-through certificates		3,640		247		—		3,887
Total	$	7,013	$	511	$	—	$	7,524

At September 30, 2013 and December 31, 2012, the Company had $-0- and $3.0 million, respectively, in mortgage-backed securities pledged as collateral for the treasury, tax and loan account and certain deposits. There were no sales of mortgage-backed securities in 2013 or 2012.

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(9) Loans Receivable - Net

Loans receivable consist of the following:

Dollars in Thousands	At September 30,		At December 31,
	2013		2012
Real estate loans:
Single-family	$	124,327	$	126,676
Multi-family		23,253		20,935
Commercial		115,768		111,309
Land and construction		13,461		10,654
Commercial business		10,590		9,852
Consumer		4,714		5,348
Total loans receivable		292,113		284,774
Less:
Deferred fees		(730)		(979)
Allowance for loan losses		(4,504)		(4,919)
Loans receivable - net	$	286,879	$	278,876

The Company originates loans to customers located primarily in Southeastern Pennsylvania. This geographic concentration of credit exposes the Company to a higher degree of risk associated with this economic region. 

Single-family real estate loans primarily consist of first mortgage liens on existing single-family residences and home equity loans. The Company intends to continue to originate permanent loans secured by first mortgage liens and home equity loans on single-family residential properties in the future.

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 Company will originate and purchase these loans either with fixed interest rates or with interest rates which adjust in accordance with a designated index.

The Company 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 Company has 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.

The Company 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 Company include deposit account secured loans and lines of credit.

21

 

(10) Loan Credit Quality

For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan may be currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. Generally, when a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of September 30, 2013:

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 or More Days		Total Past Due		Current		Total Loans Receivable		Loans Receivable Greater Than 90 Days Past Due and Accruing
Real estate:
Single-family	$	828	$	210	$	2,150	$	3,188	$	121,139	$	124,327	$	628
Multi-family		—		—		—		—		23,253		23,253		—
Commercial		677		1,034		505		2,216		113,552		115,768		—
Land and construction		—		—		—		—		13,461		13,461		—
Commercial business		—		—		—		—		10,590		10,590		—
Consumer		116		136		368		620		4,094		4,714		368
Total	$	1,621	$	1,380	$	3,023	$	6,024	$	286,089	$	292,113	$	996

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The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2012:

(Dollars in thousands)	30-59 Days Past Due			60-89 Days Past Due		90 or More Days		Total Past Due		Current		Total Loans Receivable		Loans Receivable Greater Than 90 Days Past Due and Accruing
Real estate:
Single-family	$	1,723	$	496	$	2,406	$	4,625	$	122,051	$	126,676	$	1,742
Multi-family		—		—		—		—		20,953		20,935		—
Commercial		2,155		276		2,873		5,304		106,005		111,309		—
Land and construction		—		—		—		—		10,654		10,654		—
Commercial business		—		—		—		—		9,852		9,852		—
Consumer		148		124		324		596		4,752		5,348		324
Total	$	4,026	$	896	$	5,603	$	10,525	$	274,249	$	284,774	$	2,066

The following table presents nonaccrual loans by classes of the loan portfolio as of September 30, 2013 and December 31, 2012:

	September 30, 2013		December 31,  2012
(Dollars in thousands)
Real estate:
Single-family	$	1,522	$	644
Multi-family		—		—
Commercial		505		2,873
Land and construction		—		—
Commercial business		—		—
Consumer		—		—
Total non-accruing loans	$	2,027	$	3,537

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.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

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The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. An unallocated component, if any, is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include: 

1.	Lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices.
2.	National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans.
3.	Nature and volume of the portfolio and terms of loans.
4.	Experience, ability, and depth of lending management and staff.
5.	Volume and severity of past due, classified and nonaccrual loans as well as and other loan modifications.
6.	Quality of the Company’s loan review system, and the degree of oversight by the Company’s Board of Directors.
7.	Existence and effect of any concentrations of credit and changes in the level of such concentrations.
8.	Effect of external factors, such as competition and legal and regulatory requirements.

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.

Single family real estate loans involve certain risks such as interest rate risk and risk of non repayment. Adjustable-rate single family real estate loans decreases the interest rate risk to the Company that is 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. Repayment risk can be affected by job loss, divorce, illness and personal bankruptcy or the borrower.

Multi-family and commercial real estate lending entails significant risks. 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.

24

Construction lending is generally considered to involve a high risk 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 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 Company than construction loans to individuals on their personal residences.

Commercial business lending is generally considered higher risk due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on the business assets. Commercial business loans are primarily secured by inventories and other business. In most cases, any repossessed collateral for a defaulted commercial business loans will not provide an adequate source of repayment of the outstanding loan balance.

Consumer loans generally have shorter terms and higher interest rates than other lending but generally involve high credit risk 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.

The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial and construction loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss.  Loans criticized special mention have potential weaknesses that deserve management’s close attention.  If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects.  Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable.  Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.

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 Department and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan losses. The Department and the FDIC may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.

25

 

 The following table presents the activity in the allowance for loan losses and related recorded investment in loans receivable by classes of the loans individually and collectively evaluated for impairment as of and for the three and nine months ended September 30, 2013:

(Dollars in thousands)	Single Family Real Estate		Multi Family Real Estate		Commercial Real Estate		Land and Construction		Consumer		Commercial Business		Total
Allowance for loan losses for the three months ended September 30, 2013:
Beginning balance	$	953	$	148	$	2,395	$	651	$	10	$	225	$	4,382
Charge-offs		(8)		—		(18)		—		(4)		—		(30)
Recoveries		—		—		—		—		2		—		2
Provisions		45		97		199		(209)		3		15		150
Ending balance	$	990	$	245	$	2,576	$	442	$	11	$	240	$	4,504
Allowance for loan losses for the nine months ended September 30, 2013:
Beginning balance	$	1,027	$	623	$	2,674	$	352	$	18	$	225	$	4,919
Charge-offs		(241)		(359)		(310)		—		(6)		—		(916)
Recoveries		18		—		—		30		—		3		51
Provisions		186		(19)		212		60		(1)		12		450
Ending balance	$	990	$	245	$	2,576	$	442	$	11	$	240	$	4,504
Ending balance:
individually evaluated for impairment	$	18	$	—	$	755	$	—	$	—	$	—	$	773
Ending balance:
collectively evaluated for impairment	$	972	$	245	$	1,821	$	442	$	11	$	240	$	3,731
Loans receivable:
Ending balance	$	124,327	$	23,253	$	115,768	$	13,461	$	4,714	$	10,590	$	292,113
Ending balance:
individually evaluated for impairment	$	555	$	—	$	9,969	$	—	$	—	$	—	$	10,524
Ending balance:
collectively evaluated for impairment	$	123,772	$	23,253	$	105,799	$	13,461	$	4,714	$	10,590	$	281,589

26

The following table presents the activity in the allowance for loan losses and related recorded investment in loans receivable by classes of the loans individually and collectively evaluated for impairment as of and for the three and nine months ended September 30, 2012:

(Dollars in thousands)	Single Family Real Estate		Multi Family Real Estate		Commercial Real Estate		Land and Construction		Consumer		Commercial Business		Total
Allowance for loan losses for the three months ended September 30, 2012:
Beginning balance	$	720	$	650	$	2,240	$	432	$	22	$	235	$	4,299
Charge-offs		(23)		—		(59)		—		(2)		—		(84)
Recoveries		—		—		12		—		1		—		13
Provisions		10		(78)		303		(8)		(1)		(1)		225
Ending balance	$	707	$	572	$	2,496	$	424	$	20	$	234	$	4,453
Allowance for loan losses for the nine months ended September 30, 2012:
Beginning balance	$	693	$	234	$	2,289	$	525	$	20	$	239	$	4,000
Charge-offs		(42)		—		(59)		(439)		(7)		—		(547)
Recoveries		9		—		12		2		2		—		25
Provisions		47		338		254		336		5		(5)		975
Ending balance	$	707	$	572	$	2,496	$	424	$	20	$	234	$	4,453
Ending balance:
individually evaluated for impairment	$	—	$	482	$	689	$	—	$	—	$	—	$	1,171
Ending balance:
collectively evaluated for impairment	$	707	$	90	$	1,807	$	424	$	20	$	234	$	3,282
Loans receivable:
Ending balance	$	120,466	$	12,900	$	116,978	$	16,551	$	9,207	$	5,477	$	281,579
Ending balance:
individually evaluated for impairment	$	—	$	3,569	$	7,965	$	3,161	$	—	$	—	$	14,695
Ending balance:
collectively evaluated for impairment	$	120,466	$	9,331	$	109,013	$	13,390	$	9,207	$	5,477	$	266,884

27

The following table presents the allowance for loan losses and related recorded investment in loans receivable by classes of the loans individually and collectively evaluated for impairment as of December 31, 2012:

(Dollars in thousands)	Single Family Real Estate		Multi Family Real Estate		Commercial Real Estate		Land and Construction		Consumer		Commercial Business		Total
Allowance for loan losses:
Ending balance	$	1,027	$	623	$	2,674	$	352	$	18	$	225	$	4,919
Ending balance:
individually evaluated for impairment	$	8	$	436	$	802	$	—	$	—	$	—	$	1,246
Ending balance:
collectively evaluated for impairment	$	1,019	$	187	$	1,872	$	352	$	18	$	225	$	3,673
Loans receivable:
Ending balance	$	126,676	$	20,935	$	111,309	$	10,654	$	5,348	$	9,852	$	284,774
Ending balance:
individually evaluated for impairment	$	564	$	3,815	$	7,895	$	—	$	—	$	—	$	12,274
Ending balance:
collectively evaluated for impairment	$	126,112	$	17,120	$	103,414	$	10,654	$	5,348	$	9,852	$	272,500

28

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of September 30, 2013:

			Special
	Pass		Mention		Substandard		Doubtful		Total
(Dollars in thousands)
Real estate:
Single-family	$	120,433	$	1,745	$	2,149	$	—	$	124,327
Multi-family		23,253		—		—		—		23,253
Commercial		105,799		1,822		8,147		—		115,768
Land and construction		13,461		—		—		—		13,461
Commercial business		10,590		—		—		—		10,590
Consumer		4,714		—		—		—		4,714
Total	$	278,250	$	3,567	$	10,296	$	—	$	292,113

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of December 31, 2012:

			Special
	Pass		Mention		Substandard		Doubtful		Total
(Dollars in thousands)
Real estate:
Single-family	$	122,821	$	1,409	$	2,446	$	—	$	126,676
Multi-family		17,120		—		3,815		—		20,935
Commercial		101,911		2,680		6,718		—		111,309
Land and construction		10,654		—		—		—		10,654
Commercial business		9,852		—		—		—		9,852
Consumer		5,348		—		—		—		5,348
Total	$	267,706	$	4,089	$	12,979	$	—	$	284,774

Loan Impairment

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and industrial loans, commercial real estate loans and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

29

An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. Currently, estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.

The Company does not separately identify individual single-family loans secured by real estate unless such loans are the subject of a troubled debt restructuring agreement. Large groups of these smaller balance homogeneous loans are collectively evaluated for impairment.

For multi-family, land and construction, and commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

For commercial business loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

The Company does not separately identify consumer and other loans unless such loans are the subject of a troubled debt restructuring agreement. Large groups of these smaller balance homogeneous loans are collectively evaluated for impairment.

Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a below market rate reduction in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification.  Loans classified as troubled debt restructurings are designated as impaired.

30

The following table summarizes information in regards to impaired loans by loan portfolio class as of and for the three months ended September 30, 2013:

			Unpaid				Average		Interest Income
	Recorded		Principal		Related		Recorded		Recognized
(Dollars in Thousands)	Investment		Balance		Allowance		Investment		While Impaired
With no related allowance recorded:
Real estate:
Single-family	$	364	$	364	$	—	$	364	$	4
Commercial	$	3,490	$	3,490	$	—	$	3,490	$	48
With an allowance recorded:
Real estate:
Single-family	$	191	$	191	$	18	$	191	$	4
Commercial	$	6,479	$	6,555	$	755	$	6,479	$	84
Total:
Real estate:
Single-family	$	555	$	555	$	18	$	555	$	8
Commercial	$	9,969	$	10,045	$	755	$	9,969	$	132

The following table summarizes information in regards to impaired loans by loan portfolio class as of and for the nine months ended September 30, 2013:

			Unpaid				Average		Interest Income
	Recorded		Principal		Related		Recorded		Recognized
(Dollars in Thousands)	Investment		Balance		Allowance		Investment		While Impaired
With no related allowance recorded:
Real estate:
Single-family	$	364	$	364	$	—	$	364	$	10
Commercial	$	3,490	$	3,490	$	—	$	2,904	$	143
With an allowance recorded:
Real estate:
Single-family	$	191	$	191	$	18	$	191	$	9
Commercial	$	6,479	$	6,555	$	755	$	6,479	$	217
Total:
Real estate:
Single-family	$	555	$	555	$	18	$	555	$	19
Commercial	$	9,969	$	10,045	$	755	$	9,383	$	360

31

 

The following table summarizes information in regards to impaired loans by loan portfolio class as of and for the three months ended September 30, 2012:

			Unpaid				Average		Interest Income
	Recorded		Principal		Related		Recorded		Recognized
(Dollars in Thousands)	Investment		Balance		Allowance		Investment		While Impaired
With no related allowance recorded:
Real estate:
Commercial	$	1,335	$	1,335	$	—	$	1,335	$	47
Land and construction	$	3,161	$	6,188	$	—	$	3,161	$	—
With an allowance recorded:
Real estate:
Multi-family	$	3,569	$	3,569	$	482	$	3,569	$	23
Commercial	$	6,630	$	6,630	$	689	$	6,630	$	75
Total:
Real estate:
Multi-family	$	3,569	$	3,569	$	482	$	3,569	$	23
Commercial	$	7,965	$	7,965	$	689	$	7,496	$	122
Land and construction	$	3,161	$	6,188	$	—	$	3,161	$	—

The following table summarizes information in regards to impaired loans by loan portfolio class as of and for the nine months ended September 30, 2012:

			Unpaid				Average		Interest Income
	Recorded		Principal		Related		Recorded		Recognized
(Dollars in Thousands)	Investment		Balance		Allowance		Investment		While Impaired
With no related allowance recorded:
Real estate:
Commercial	$	1,335	$	1,335	$	—	$	1,335	$	56
Land and construction	$	3,161	$	6,188	$	—	$	3,161	$	—
With an allowance recorded:
Real estate:
Multi-family	$	3,569	$	3,569	$	482	$	3,569	$	82
Commercial	$	6,630	$	6,630	$	689	$	6,630	$	236
Total:
Real estate:
Multi-family	$	3,569	$	3,569	$	482	$	3,569	$	82
Commercial	$	7,965	$	7,965	$	689	$	7,496	$	292
Land and construction	$	3,161	$	6,188	$	—	$	3,161	$	—

32

The following table summarizes information in regards to loans classified as impaired loans by loan portfolio class as of and during the year ended December 31, 2012:

			Unpaid				Average		Interest Income
	Recorded		Principal		Related		Recorded		Recognized
(Dollars in Thousands)	Investment		Balance		Allowance		Investment		While Impaired
With no related allowance recorded:
Real estate:
Commercial	$	423	$	423	$	—	$	336	$	33
With an allowance recorded:
Real estate:
Single-family	$	564	$	564	$	8	$	424	$	18
Multi-family	$	3,815	$	3,815	$	436	$	3,351	$	111
Commercial	$	7,472	$	7,472	$	802	$	6,752	$	304
Total:
Real estate:
Single-family	$	564	$	564	$	8	$	424	$	18
Multi-family	$	3,815	$	3,815	$	436	$	3,351	$	111
Commercial	$	7,895	$	7,895	$	802	$	7,088	$	337

There were no troubled debt restructurings during the three months ended September 30, 2013 or the three months ended September 30, 2012.  There were no troubled debt restructurings with a payment default, with the payment default occurring within 12 months of restructure, during the three months ended September 30, 2013 or the three months ended September 30, 2012.

The following table summarizes information in regards to loans classified as troubled debt restructurings during the nine months ended September 30, 2013:

					Post-Modification
			Pre-Modification		Outstanding
	Number of		Outstanding Recorded		Recorded
(Dollars in Thousands)	Contracts		Investments		Investments
Real estate:
Commercial		2	$	891	$	921

33

There were no troubled debt restructurings with a payment default, with the payment default occurring within 12 months of restructure, during the nine months ended September 30, 2013.

The following table summarizes information in regards to loans classified as troubled debt restructurings during the nine months ended September 30, 2012:

					Post-Modification
			Pre-Modification		Outstanding
	Number of		Outstanding Recorded		Recorded
(Dollars in Thousands)	Contracts		Investments		Investments
Real estate:
Commercial		7	$	3,445	$	3,445

There were no troubled debt restructurings with a payment default, with the payment default occurring in within the 12 months of restructure, during the nine months ended September 30, 2012.

At September 30, 2013, the Company had three single-family loans with a carrying value of $555,000 and eleven commercial real estate loans with a carrying value of $5.8 million classified as troubled debt restructurings. Of the three single-family real estate loans, two were classified as special mention and one as substandard in the Company’s allowance for loan losses, are to two borrowers, and had a total allowance of $18,000 against them.  Of the eleven commercial real estate loans, six were classified as special mention and five were classified as substandard in the Company’s allowance for loan losses. The six loans classified as special mention loans are to two borrowers and have a total allowance of $73,000 against them. The five loans classified as substandard are to five borrowers and have a total allowance of $514,000 against them. All of the troubled debt restructurings consisted of changes in interest rates and no principal was forgiven. 

At December 31, 2012, the Company had one single-family loan with a carrying value of $191,000, two multi-family loans with a carrying value of $3.8 million, and eleven commercial real estate loans with a carrying value of $5.3 million classified as troubled debt restructurings. The one single-family loan was classified as substandard in the Company’s allowance for loan losses and had an $8,000 allowance against it. The two multi-family loans are to one borrower, were classified as substandard in the Company’s allowance for loan losses, and have $436,000 of allowances against them. The eleven commercial real estate loans are to four borrowers and have $557,000 of allowances against them. Eight of the eleven commercial real estate loans are to two borrowers and are classified as special mention in the Company’s allowance for loan losses. Three of the eleven commercial real estate loans and are classified as substandard in the Company’s allowance for loan losses. All of the troubled debt restructurings consisted of changes in interest rates and no principal was forgiven.

(11) Stock-Based Compensation

Recognition and Retention Plan and Trust

In July of 2011, the shareholders of the Company approved the adoption of the Company’s 2011 Recognition and Retention Plan and Trust (the “2011 RRP”). Pursuant to the terms of the 2011 RRP, awards of up to 218,977 shares of restricted common stock may be granted to employees and directors. In order to fund the 2011 RRP, the 2011 RRP acquired 218,977 shares of the Company’s common stock in the open market for approximately $2.4 million at an average price of $11.14 per share. During 2012 and 2011, the Company made sufficient contributions to the 2011 RRP to fund the purchase of these shares. Pursuant to the terms of the 2011 RRP, no additional shares will be acquired. On July 20, 2011, a total of 208,200 2011 RRP awards were granted. On July 20, 2012, a total of 3,000 2011 RRP awards were granted. The 2011 RRP shares generally vest at the rate of 20% per year over five years.

34

A summary of the status of the shares under the 2011 RRP as of September 30, 2013 and changes during the three months ended September 30, 2013 are presented below:

	Three Months Ended September 30, 2013
		Weighted
	Number of	average grant
	Shares	date fair value
Restricted at the beginning of period	169,560	$	11.08
Granted	—		—
Vested	42,240	$	11.07
Forfeited	—		—
Restricted at the end of period	127,320	$	11.08

A summary of the status of the shares under the 2011 RRP as of September 30, 2013 and changes during the nine months ended September 30, 2013 are presented below:

	Nine Months Ended September 30, 2013
		Weighted
	Number of	average grant
	shares	date fair value
Restricted at the beginning of period	169,560	$	11.08
Granted	—		—
Vested	42,240	$	11.07
Forfeited	—		—
Restricted at the end of period	127,320	$	11.08

35

A summary of the status of the shares under the 2011 RRP as of September 30, 2012 and changes during the three months ended September 30, 2012 are presented below:

	Three Months Ended September 30, 2012
		Weighted
	Number of	average grant
	shares	date fair value
Restricted at the beginning of period	208,200	$	11.05
Granted	3,000	$	12.47
Vested	41,640	$	11.05
Forfeited	—		—
Restricted at the end of period	169,560	$	11.08

A summary of the status of the shares under the 2011 RRP as of September 30, 2012 and changes during the nine months ended September 30, 2012 are presented below:

	Nine Months Ended September 30, 2012
		Weighted
	Number of	average grant
	shares	date fair value
Restricted at the beginning of period	208,200	$	11.05
Granted	3,000	$	12.47
Vested	41,640	$	11.05
Forfeited	—		—
Restricted at the end of period	169,560	$	11.08

Compensation expense on 2011 RRP shares granted is recognized ratably over the five year vesting period in an amount which totals the market price of the common stock at the date of grant. During the three months ended September 30, 2013, approximately 10,560 shares were amortized to expense, based on the proportional vesting of the awarded shares, resulting in recognition of approximately $112,000 in compensation expense with a related tax benefit of $38,000. During the nine months ended September 30, 2013, approximately 31,680 shares were amortized to expense, based on the proportional vesting of the awarded shares, resulting in recognition of approximately $336,000 in compensation expense with a related tax benefit of $114,000. During the three months ended September 30, 2012, approximately 10,560 shares were amortized to expense, based on the proportional vesting of the awarded shares, resulting in recognition of approximately $112,000 in compensation expense with a related tax benefit of $38,000. During the nine months ended September 30, 2012, approximately 31,380 shares were amortized to expense, based on the proportional vesting of the awarded shares, resulting in recognition of approximately $333,000 in compensation expense with a related tax benefit of $113,000. As of September 30, 2013, approximately $1.2 million in additional compensation expense is scheduled to be recognized over the remaining vesting period of 2.6 years. Under the terms of the 2011 RRP, any unvested 2011 RRP awards will become fully vested upon a change in control of the Company resulting in the full recognition of any unrecognized expense.

36

Stock Options

In July 2011, the shareholders of the Company also approved the adoption of the Company’s 2011 Stock Option Plan (the “2011 Option Plan”). Pursuant to the 2011 Option Plan, options to acquire 325,842 shares of common stock may be granted to employees and directors. Under the 2011 Option Plan, options generally become vested and exercisable at the rate of 20% per year over five years and are generally exercisable for a period of ten years after the grant date. On July 20, 2011, options to purchase 277,750 shares of common stock were awarded. On July 20, 2011, options to purchase 9,500 shares of common stock were awarded. As of September 30, 2013, a total of 38,592 shares of common stock have been reserved for future grant pursuant to the 2011 Option Plan.

A summary of the status of the Company’s stock options under the 2011 Option Plan as of September 30, 2013, and changes during the three and nine months ended September 30, 2013, is presented below:

	Three Months Ended September 30, 2013
		Weighted
	Number of	average
	shares	exercise price
Options outstanding at the beginning of period	287,250	$	11.10
Granted	—		—
Exercised	—		—
Vested	—		—
Forfeited	—		—
Options outstanding at the end of period	287,250	$	11.10
Exercisable at end of the period	111,900	$	11.07

	Nine Months Ended September 30, 2013
		Weighted
	Number of	average
	Shares	exercise price
Options outstanding at the beginning of period	287,250	$	11.10
Granted	—		—
Exercised	—		—
Vested	—		—
Forfeited	—		—
Options outstanding at the end of period	287,250	$	11.10
Exercisable at end of the period	111,900	$	11.07

37

The fair value of each option grant was estimated using the Black-Scholes pricing model with the following weighted average assumptions for the options granted in 2011: dividend yield of 2.0%, risk-free interest rate of 1.58%, expected life of 7.0 years, and volatility of 30.34%. The calculated fair value of options granted in 2011 was $2.99. The fair value of each option grant is estimated using the Black-Scholes pricing model with the following weighted average assumptions for the options granted in 2012: dividend yield of 2.0%, risk-free interest rate of 0.71%, expected life of 7.0 years, and volatility of 28.87%. The calculated fair value of options granted in 2012 was $3.08. The weighted average contractual term of the options was 7.8 years at September 30, 2013.

During the three months ended September 30, 2013, approximately $41,000 was recognized in compensation expense, with a related $14,000 tax benefit, for the 2011 Option Plan. During the nine months ended September 30, 2013, approximately $124,000 was recognized in compensation expense, with a related $42,000 tax benefit, for the 2011 Option Plan. At September 30, 2013, approximately $459,000 in additional compensation expense for awarded options remained unrecognized. The weighted average period over which this expense will be recognized is approximately 2.6 years. During the three months ended September 30, 2012, approximately $41,000 was recognized in compensation expense, with a related $14,000 tax benefit, for the 2011 Option Plan. During the nine months ended September 30, 2012, approximately $121,000 was recognized in compensation expense, with a related $41,000 tax benefit, for the 2011 Option Plan.

(12) Contingent Obligations

The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. The Company has issued unconditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit totaled approximately $1.7 million at September 30, 2013 and $888,000 at December 31, 2012 and represent the maximum potential future payments the Company could be required to make. Typically, these instruments have terms of twelve months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit for on-balance sheet instruments. Company policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios are generally consistent with loan-to-value requirements for other commercial loans secured by similar types of collateral.

38

 

Part I – Item 2.

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

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

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

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

General. The Company’s profitability is highly dependent on net interest income. The components that drive net interest income are the amounts of interest-earning assets and interest-bearing liabilities along with rates earned or paid on such rate sensitive instruments. The Company manages interest rate exposure by attempting to match asset maturities with liability maturities. In addition to managing interest rate exposure, the Company also considers the credit risk, prepayment risk and extension risk of certain assets. The Company maintains asset quality by utilizing comprehensive loan underwriting standards and collection efforts as well as originating or purchasing primarily secured or guaranteed assets.

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

39

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 the consolidated financial statements in the annual report on Form 10-K for the year ended December 31, 2012. The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America (US GAAP) and to general practices within the banking industry. Accordingly, the consolidated financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.

Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Charges against the allowance for loan losses are made when management believes that the collectability 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 collectability 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 Department and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan losses. The Department and the FDIC may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.

40

Income Taxes. Management makes estimates and judgments to calculate various tax liabilities and determine the recoverability of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. As of September 30, 2013, the Company had approximately $267,000, $864,000, and $575,000 of capital loss carryforwards, expiring in 2013, 2014, and 2015, respectively, which resulted in a deferred tax asset of $599,000. The Company expects to fully realize the benefit of such carryforwards through tax planning and sales/leaseback of capital assets.

As of September 30, 2013, the Company had approximately $432,000 of State net operating loss carryforwards expiring in 2013 and 2014, and $4.6 million of State net operating loss carryforwards, transferred from the former mutual holding company, expiring from 2019 through 2030. The Company has recorded a full valuation allowance for these carryforwards as projected State taxable income at the Company is not anticipated to be sufficient to realize these benefits.

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

Other than Temporary Impairment of Investment Securities and Mortgage Backed Securities. The Company is required to perform periodic reviews of individual securities in its investment portfolio to determine whether a decline in the fair value of a security below its amortized cost is other than temporary. A review of other than temporary impairment requires management to make certain judgments regarding the nature of the decline, its effect on the consolidated financial statements and the probability, extent and timing of a valuation recovery. Management evaluates securities for other than temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluations. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

Comparison of Financial Condition at September 30, 2013 and December 31, 2012

Total assets decreased $24.9 million or 5.4% to $436.0 million at September 30, 2013 compared to $460.9 million at December 31, 2012. This decrease was primarily due to a $49.3 million or 43.9% decrease in total cash and cash equivalents, a $2.3 million or 30.7% decrease in mortgage backed securities, and a $691,000 or 51.6% decrease in Federal Home Loan Bank (“FHLB”) stock. These decreases were partially offset by a $16.5 million or 183.8% increase in investment securities available for sale, a $2.4 million or 9.6% increase in investment securities held to maturity, and an $8.0 million or 2.9% increase in loans receivable.

Total liabilities decreased $21.5 million or 5.6% to $359.4 million at September 30, 2013 compared to $380.9 million at December 31, 2012. This decrease was primarily due to a $1.7 million or 10.7% decrease in non-interest bearing deposits, and a $20.2 million or 5.7% decrease in interest bearing deposits. The decrease in total liabilities is net of a $275,000 or 8.4% increase in other borrowings from December 31, 2012 to September 30, 2013.

41

Stockholders’ equity decreased $3.4 million to $76.6 million as of September 30, 2013 compared to $80.0 million at December 31, 2012. The decrease was due to $4.1 million of treasury stock acquired combined with $764,000 in dividends paid. These decreases were partially offset by net income of $1.4 million for the nine months ended September 30, 2013.

Nonperforming assets decreased $1.6 million to $6.0 million or 1.39% of total assets at September 30, 2013 as compared to $7.7 million or 1.67% of total assets at December 31, 2012. The nonperforming assets at September 30, 2013 included $3.0 million in nonperforming loans and $3.0 million in other real estate owned. The decrease in nonperforming assets was primarily due to a $2.6 million decrease in nonperforming loans, partially offset by a $931,000 increase in other real estate owned as of September 30, 2013. Overall, nonperforming loans included $2.1 million in single-family residential real estate loans, $505,000 in commercial real estate loans, and $368,000 in student loans, which are fully guaranteed by the U.S. Government. The Company continues to aggressively work towards the resolution of its nonperforming assets. The allowance for loan losses amounted to $4.5 million or 149.0% of nonperforming loans at September 30, 2013 as compared to $4.9 million or 87.8% at December 31, 2012.

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

Comparison of Results of Operations for the Three and Nine Months ended September 30, 2013 and September 30, 2012

General. Net income decreased $107,000 or 16.7% to $533,000 or $0.11 per share (dilutive) for the three months ended September 30, 2013 as compared to $640,000 or $0.12 per share (dilutive) for the same period in 2012. The decrease in net income was primarily due to a $136,000 or 43.2% decrease in other income and a $221,000 or 5.0% decrease in total interest and dividend income. These decreases were partially offset by a $75,000 or 33.3% decrease in the provision for loan losses and a $169,000 or 21.8% decrease in total interest expense.

Net income decreased $720,000 or 34.2% to $1.4 million or $0.28 per share (dilutive) for the nine months ended September 30, 2013 as compared to $2.1 million or $0.40 per share (dilutive) for the same period in 2012. The decrease in net income was primarily due to a $1.2 million or 68.0% decrease in other income, a $772,000 or 5.8% decrease in total interest and dividend income, and a $179,000 or 2.0% increase in other expense. These decreases were partially offset by a $525,000 or 53.8% decrease in the provision for loan losses, a $598,000 or 24.0% decrease in total interest expense, and a $292,000 or 47.2% decrease in income tax expense.

42

 

Net Interest Income. Net interest income is determined by the interest rate spread (i.e., the difference between the yields earned on 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 $52,000 or 1.4% during the three months ended September 30, 2013 as compared to the same period in 2012. The decrease in net interest income was primarily due to a $221,000 or 5.0% decrease in income on interest-earnings assets, offset by a $169,000 or 21.8% decrease in income on interest-bearing liabilities. As a result, the interest rate spread increased 16 basis points from 3.13% for the three months ended September 30, 2012 to 3.29% for the three months ended September 30, 2013. 

Net interest income decreased $174,000 or 1.6% during the nine months ended September 30, 2013 as compared to the same period in 2012. The decrease in net interest income was primarily due to a $772,000 or 5.8% decrease in interest income on interest-earning assets, partially offset by a $598,000 or 24.0% decrease in interest expense on interest-bearing liabilities. As a result, the interest rate spread increased 11 basis points from 3.05% for the nine months ended September 30, 2012 to 3.16% for the nine months ended September 30, 2013. 

Based on the current economic environment and market competition, management anticipates pressure on the interest rate spread for the remainder of 2013 which may negatively impact net interest income.

Interest Income.  Interest income decreased $221,000 or 5.0% to $4.2 million for the three months ended September 30, 2013, compared to the same period in 2012. The decrease was due to a $97,000 or 2.5% decrease in interest income on loans, a $33,000 or 38.4% decrease in interest income on mortgage-backed securities, a $74,000 or 23.1% decrease in interest income on investment securities, and a $17,000 or 27.0% decrease in interest income earned on balances due from depository institutions. The decrease in interest income on loans was due to a 26 basis point or 4.7% decrease in the average yield earned, partially offset by a $6.3 million or 2.2% increase in the average balance of loans outstanding. The decrease in interest income on mortgage-backed securities was due to a $3.3 million or 36.8% decrease in the average balance of mortgage-backed securities and a 10 basis point or 2.6% decrease in the average yield earned. The decrease in interest income on investment securities was due to a 80 basis point or 26.9% decrease in the average yield earned, partially offset by a $2.4 million or 5.4% increase in the average balance of investment securities. The decrease in interest income on balances due from depository institutions was due to a $30.9 million or 28.7% decrease in the average balance of balances due from depository institutions, partially offset by a 1 basis point or 4.3% increase in the average yield earned.

Interest income decreased $772,000 or 5.8% to $12.4 million for the nine months ended September 30, 2013, compared to the same period in 2012. The decrease was due to a $439,000 or 3.7% decrease in interest income on loans, a $109,000 or 37.5% decrease in interest income on mortgage-backed securities, a $202,000 or 22.0% decrease in interest income on investment securities, and a $22,000 or 11.8% decrease in interest income earned on balances due from depository institutions. The decrease in interest income on loans was due to a 22 basis point or 4.0% decrease in the average yield earned on loans, partially offset by a $1.1 million or 0.4% increase in the average balance of loans outstanding. The decrease in interest income on mortgage-backed securities was due to a $3.5 million or 35.0% decrease in the average balance of mortgage-backed securities and a 15 basis point or 3.8% decrease in the average yield earned. The decrease in interest income on investment securities was due to a $4.8 million or 10.4% decrease in the average balance of investment securities and a 35 basis point or 13.2% decrease in the average yield earned. The decrease in interest income on balances due from depository institutions was due to a $14.1 million or 13.1% decrease in the average balance of balances due from depository institutions.

43

Interest Expense. Interest expense decreased $169,000 or 21.8% to $605,000 for the three months ended September 30, 2013, compared to the same period in 2012. This decrease was primarily due to a $169,000 or 21.9% decrease in interest expense on deposits. The decrease in interest expense on deposits was due to a $26.8 million or 7.3% decrease in the average balance of deposits and a 14 basis point or 16.5% decrease in the rates paid on deposits. 

Interest expense decreased $598,000 or 24.0% to $1.9 million for the nine months ended September 30, 2013, compared to the same period in 2012. This decrease was primarily due to a $596,000 or 24.0% decrease in interest expense on deposits and a $2,000 or 33.3% decrease in interest expense on other borrowings. The decrease in interest expense on deposits was due to a $24.9 million or 6.7% decrease in the average balance of deposits and a 17 basis point or 18.9% decrease in the rates paid on deposits. The decrease in interest expense on other borrowings was due to a $325,000 or 11.1% decrease in the average balance of other borrowings and a 6 basis point or 22.2% decrease in the rates paid on other borrowings.

44

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

	Three Months Ended September 30,
	2013						2012
	Average						Average
	Balance		Interest		Rate		Balance		Interest		Rate
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) (3)	$	289,947	$	3,837	5.29	%	$	283,618	$	3,934	5.55	%
Mortgage-backed securities (3)		5,631		53	3.76			8,915		86	3.86
Investment securities (3)		45,578		247	2.17			43,224		321	2.97
Due from depository institutions		76,861		46	0.24			107,739		63	0.23
Total interest-earning assets		418,017		4,183	4.00			443,496		4,404	3.97
Noninterest-earning assets		23,147						29,170
Total assets	$	441,164					$	472,666
Interest-bearing liabilities:
Deposits	$	338,415		604	0.71		$	365,184		773	0.85
Other borrowings		2,220		1	0.18			2,711		1	0.15
Total interest-bearing liabilities		340,635		605	0.71			367,895		774	0.84
Noninterest-bearing
Liabilities		21,976						21,856
Total liabilities		362,611						389,751
Stockholders’ equity		78,553						82,915
Total liabilities and
stockholders’ equity	$	441,164					$	472,666
Net interest-earning assets	$	77,382					$	75,601
Net interest income/interest
rate spread			$	3,578	3.29	%			$	3,630	3.13	%
Net yield on interest-
Earning assets (2)					3.42	%					3.27	%

_____________________________

1.     Nonaccrual loans and loan fees have been included.

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

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

45

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

	Nine Months Ended September 30,
	2013						2012
	Average						Average
	Balance		Interest		Rate		Balance		Interest		Rate
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) (3)	$	285,022	$	11,367	5.32	%	$	283,909	$	11,806	5.54	%
Mortgage-backed securities (3)		6,429		182	3.77			9,891		291	3.92
Investment securities (3)		41,215		715	2.31			46,021		917	2.66
Due from depository institutions		93,274		165	0.24			107,326		187	0.23
Total interest-earning assets		425,940		12,429	3.89			447,147		13,201	3.94
Noninterest-earning assets		23,302						30,024
Total assets	$	449,242					$	477,171
Interest-bearing liabilities:
Deposits	$	344,977		1,890	0.73		$	369,910		2,486	0.90
Other borrowings		2,592		4	0.21			2,917		6	0.27
Total interest-bearing liabilities		347,569		1,894	0.73			372,827		2,492	0.89
Noninterest-bearing
Liabilities		22,195						21,401
Total liabilities		369,764						394,228
Stockholders’ equity		79,478						82,943
Total liabilities and
stockholders’ equity	$	449,242					$	477,171
Net interest-earning assets	$	78,371					$	74,320
Net interest income/interest
rate spread			$	10,535	3.16	%			$	10,709	3.05	%
Net yield on interest-
Earning assets (2)					3.30	%					3.19	%

_____________________________

1.    Nonaccrual loans and loan fees have been included.

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

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

46

 

Provision for Loan Losses.  The provision for loan losses amounted to $150,000 for the three months ended September 30, 2013 as compared to $225,000 for the three months ended September 30, 2012. The provision for loan losses amounted to $450,000 for the nine months ended September 30, 2013 as compared to $975,000 for the nine months ended September 30, 2012.  The decrease in the provision for loan losses in the 2013 periods compared to the 2012 periods was primarily due to providing additional specific reserves of $413,000 for two former participation loans in the prior year, which were subsequently sold. Such provisions were primarily to maintain a reserve level deemed appropriate by management in light of factors such as the level of nonperforming loans and the current economic environment. 

Other Income. Other income was $179,000 for the three months ended September 30, 2013 as compared to $315,000 for the same period in 2012. The decrease in other income is primarily attributed to a $1,000 loss on the sale of other real estate owned (“OREO”) for the three months ended September 30, 2013 compared to a $125,000 gain on the sale of OREO for the three months ended September 30, 2012.

Other income was $556,000 for the nine months ended September 30, 2013 as compared to $1.7 million for the same period in 2012. The decrease was primarily the result of an $806,000 gain on the sale of premises and equipment from the sale of real property formerly held by the Company’s former mutual holding company during the nine months ended September 30, 2012. The decrease in other income also included a $2,000 loss in the sale of OREO for the nine months ended September 30, 2013 compared to a $326,000 gain on the sale of OREO for the nine months ended September 30, 2012.

Other Expenses. Other expenses decreased $4,000 for the three months ended September 30, 2013 compared to the same period in 2012. The decrease was primarily due to a $26,000 or 25.0% decrease in FDIC deposit insurance premiums, an $8,000 or 6.5% decrease in advertising and marketing expense, and a $25,000 or 46.3% decrease in loan and OREO expense. These decreases were partially offset by a $14,000 or 0.8% increase in salary and employee benefits, a $27,000 or 6.1% increase in occupancy and equipment expense, and a $39,000 or 26.5% increase in professional fees.

Other expenses increased $179,000 or 2.0% to $8.9 million for nine months ended September 30, 2013 compared to the same period in 2012. The increase was primarily due to a $133,000 or 2.6% increase in salary and employee benefits, a $34,000 or 2.5% increase in occupancy and equipment expense, a $107,000 or 22.7% increase in professional fees, and a $106,000 or 100% increase in provision for OREO. These increases were partially offset by a $69,000 or 23.1% decrease in FDIC deposit insurance premiums, $29,000 or 8.3% decrease in advertising and marketing expense, and a $106,000 or 56.1% decrease in loan and OREO expense. 

Income Tax Expense. Income tax expense amounted to $160,000 and $162,000 for the three months ended September 30, 2013 and 2012, respectively, resulting in effective tax rates of 23.1% and 20.2%, respectively. Income tax expense amounted to $326,000 and $618,000 for the nine months ended September 30, 2013 and 2012, respectively, resulting in effective tax rates of 19.0% and 22.7%, respectively. The decrease in income tax expense was primarily due to a lower amount of income before income taxes.

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Liquidity and Capital Resources

Liquidity, represented by cash and cash equivalents, is a product of its cash flows from operations. The primary sources of funds are deposits, borrowings, amortization, prepayments and maturities of outstanding loans and mortgage-backed securities, sales of loans, maturities and calls of investment securities and other short-term investments and income from operations. Changes in the cash flows of these instruments are greatly influenced by economic conditions and competition. Management attempts to balance supply and demand by managing the pricing of its loan and deposit products while maintaining a level of growth consistent with the conservative operating philosophy of the management and board of directors. Any excess funds are invested in overnight and other short-term interest-earning accounts. Cash flows are generated through the retail deposit market, its traditional funding source, for use in investing activities. In addition, the borrowings such as Federal Home Loan Bank advances may be utilized for liquidity or profit enhancement. At September 30, 2013, the Company had no outstanding advances and approximately $165.5 million of additional borrowing capacity from the FHLB of Pittsburgh. Further, the Company has access to the Federal Reserve Bank discount window. At September 30, 2013, no such funds were outstanding.

The primary use of funds is to meet ongoing loan and investment commitments, to pay maturing savings certificates and savings withdrawals and expenses related to general operations of the Company. At September 30, 2013, the total approved loan commitments outstanding amounted to $13.8 million. At the same date, commitments under unused lines of credit amounted to $27.1 million. Certificates of deposit scheduled to mature in one year or less at September 30, 2013 totaled $127.9 million. Management believes that a significant portion of maturing deposits will remain with the Company. For the quarter ended September 30, 2013, there were no material changes in contractual obligations that were outside of the ordinary course of business. Management anticipates that it will continue to have sufficient cash flows to meet its current and future commitments.

Impact of Inflation and Changing Prices

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

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Part I - Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Not Applicable.

Part I - Item 4.

CONTROLS AND PROCEDURES

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

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

Part II - Other Information

Item 1. Legal Proceedings

The Company is involved in legal proceedings and litigation arising in the ordinary course of business. However, there can be no assurance that any of the outstanding legal proceedings and litigation to which the Company is a party will not be decided adversely to the Company’s interests and have a material adverse effect on the consolidated financial statements.

Item 1A. Risk Factors

Not Applicable as the Company is a Smaller Reporting Company

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

Period	Total Number of Shares Purchased(1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1)
July 2013		17,413	$	14.48		17,413		191,523
August 2013		191,523		14.90		191,523		—
September 2013		10,000		14.40		10,000		482,700
Totals		218,936	$	14.84		218,936		482,700

(1)    Shares repurchased in July and August were repurchased under the Company’s repurchase program announced on January 14, 2012, to repurchase up to 547,433 shares, or 10% of its outstanding common stock, and was completed on August 6, 2013. Shares repurchased in September were repurchased under the Company’s repurchase program announced on September 26, 2013, to repurchase up to 492,700 shares, or 10% of its outstanding common stock. The program will expire on September 26, 2014, and all shares will be purchased in the open market or by privately negotiated transactions, as in the opinion of management, market conditions warrant.

Item 3.   Defaults Upon Senior Securities

Not Applicable

Item 4.   Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

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Item 6. Exhibits

(a)  The following exhibits are filed herewith:

Ex. No.	Description
31.1	Section 302 Certification of Chief Executive Officer
31.2	Section 302 Certification of Chief Financial Officer
32.1	Section 906 Certification of Chief Executive Officer
32.2	Section 906 Certification of Chief Financial Officer
101.1.INS	XBRL Instance Document
101.2.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definitions Linkbase Document

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SIGNATURES

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

ALLIANCE BANCORP, INC. OF PENNSYLVANIA

Date: November 12, 2013	By:	/s/ Dennis D. Cirucci
		Dennis D. Cirucci, President
		and Chief Executive Officer
Date: November 12, 2013	By:	/s/ Peter J. Meier
		Peter J. Meier, Executive Vice
		President and Chief Financial Officer

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