**UNITEDSTATES**

###### **SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-K**

| **(Mark One)** |
|----------------|
| ** **     |
| **x**          | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **     | ** ** |
| ** **     | **For the fiscal year ended December 31, 2006** |
| ** **     |
| **OR**         |
| ** **     |
| **o**          | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **     | ** ** |
| ** **     | **For the transition period from                    to                  ** |

 

**Commission File Number: 001-32971**

**FOX CHASEBANCORP, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **United States**                               |   | **33-1145559**                       |
|-------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of                 |   | (I.R.S. Employer Identification No.) |
| incorporation or organization)                  |   |                                 |
|                                            |   |                                 |
| **4390 Davisville Road, Hatboro, Pennsylvania** |   | **19040**                            |
|  (Address of  principal executive offices) |   | (Zip Code)                           |

 

Registrant’s telephonenumber, including area code:  **(215) 682-7400**

Securities registeredpursuant to Section 12(b) of the Act:

 

|            | **Title of  each class**                    |       | **Name of  each exchange on which registered** |       |
|------------|---------------------------------------------|------------|------------------------------------------------|------------|
| ** ** | **Common Stock, par value $0.01 per share** | ** ** | **Nasdaq Stock Market, LLC**                   | ** ** |

Securities registeredpursuant to Section 12(g) of the Act:          **None**

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.  Yes o   No  x

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

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes   x      No o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof the registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. x

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.

(Check one):          Large Accelerated Filer o                  AcceleratedFiler o             Non-acceleratedFiler x

Indicateby check mark whether the registrant is a shell company (as defined by Rule12b-2 of the Exchange Act).  Yes o     No  x

Theaggregate market value of the voting and non-voting common equity held bynonaffiliates as of June 30, 2006 was approximately $0.

Thenumber of shares outstanding of the registrant’s common stock as of March 28,2007 was 14,679,750.

# **DOCUMENTSINCORPORATED BY REFERENCE**

# Portions of the ProxyStatement for the 2007 Annual Meeting of Stockholders are incorporated byreference in Part III of this Form 10-K.

 

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# **INDEX**

|            |   | **Part I**                                                                                                          | ** ** | ** ** | ** ** |
|------------|--------|---------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
|       |   |                                                                                                                |       |       |       |
| Item  1.   |   | Business                                                                                                            |       | 1          |       |
| Item  1A.  |   | Risk  Factors                                                                                                       |       | 16         |       |
| Item 1B.   |   | Unresolved Staff  Comments                                                                                          |       | 21         |       |
| Item  2.   |   | Properties                                                                                                          |       | 22         |       |
| Item  3.   |   | Legal  Proceedings                                                                                                  |       | 23         |       |
| Item 4.    |   | Submission of Matters  to a Vote of Security Holders                                                                |       | 23         |       |
|       |   |                                                                                                                |       |       |       |
| ** ** |   | **Part II**                                                                                                         | ** ** | ** ** | ** ** |
| ** ** |   |                                                                                                                |       |       |       |
| Item 5.    |   | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |       | 23         |       |
| Item 6.    |   | Selected Financial  Data                                                                                            |       | 25         |       |
| Item 7.    |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operation                          |       | 27         |       |
| Item 7A.   |   | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       | 58         |       |
| Item 8.    |   | Financial  Statements and Supplementary Data                                                                        |       | 58         |       |
| Item 9.    |   | Changes in and  Disagreements With Accountants on Accounting and Financial Disclosure                               |       | 58         |       |
| Item 9A.   |   | Controls and  Procedures                                                                                            |       | 59         |       |
| Item 9B.   |   | Other Information                                                                                                   |       | 59         |       |
|       |   |                                                                                                                |       |       |       |
| ** ** |   | **Part III**                                                                                                        | ** ** | ** ** | ** ** |
| ** ** |   |                                                                                                                |       |       |       |
| Item 10.   |   | Directors,  Executive Officers and Corporate Governance                                                             |       | 59         |       |
| Item 11.   |   | Executive  Compensation                                                                                             |       | 60         |       |
| Item 12.   |   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |       | 60         |       |
| Item 13.   |   | Certain  Relationships, Related Transactions and Director Independence                                              |       | 60         |       |
| Item 14.   |   | Principal  Accountant Fees and Services                                                                             |       | 61         |       |
|       |   |                                                                                                                |       |       |       |
| ** ** |   | **Part IV**                                                                                                         | ** ** | ** ** | ** ** |
| ** ** |   |                                                                                                                |       |       |       |
| Item 15.   |   | Exhibits and  Financial Statement Schedules                                                                         |       | 61         |       |
| SIGNATURES |   |                                                                                                                |       |

 

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*This annual report contains forward-lookingstatements that are based on assumptions and may describe future plans,strategies and expectations of Fox Chase Bancorp, Inc. These forward-lookingstatements are generally identified by use of the words “believe,” “expect,” “intend,”“anticipate,” “estimate,” “project” or similar expressions. Fox Chase Bancorp,Inc.’s ability to predict results or the actual effect of future plans orstrategies is inherently uncertain. Factors which could have a material adverseeffect on the operations of Fox Chase Bancorp, Inc. and its subsidiary include,but are not limited to, changes in interest rates, national and regionaleconomic conditions, legislative and regulatory changes, monetary and fiscalpolicies of the U.S. government, including policies of the U.S. Treasury andthe Federal Reserve Board, the quality and composition of the loan orinvestment portfolios, demand for loan products, deposit flows, competition,demand for financial services in Fox Chase Bancorp, Inc.’s market area, changesin real estate market values in Fox Chase Bancorp, Inc.’s market area, changesin relevant accounting principles and guidelines and inability of third partyservice providers to perform. Additional factors that may affect our resultsare discussed in Item 1A to this annual report titled “Risk Factors” below.*

*Theserisks and uncertainties should be considered in evaluating forward-lookingstatements and undue reliance should not be placed on such statements. Exceptas required by applicable law or regulation, Fox Chase Bancorp, Inc. does notundertake, and specifically disclaims any obligation, to release publicly theresult of any revisions that may be made to any forward-looking statements toreflect events or circumstances after the date of the statements or to reflectthe occurrence of anticipated or unanticipated events.*

*Unlessthe context indicates otherwise, all references in this annual report to “Company,”“we,” “us” and “our” refer to Fox Chase Bancorp, Inc. and its subsidiaries.*

**PART I**

**Item 1.        BUSINESS**

**General**

 Fox ChaseBancorp, Inc. was organized on September 29, 2006 under the laws of the UnitedStates to be a holding company for Fox Chase Bank (the “Bank”), a stock savingsbank also organized under the laws of the United States.  On September 29, 2006, the Company completedits initial public offering in which it sold 6,395,835 shares, or 43.57%, ofits outstanding common stock to the public, including 575,446 shares purchasedby the Fox Chase Bank Employee Stock Ownership Plan (the “ESOP”).  An additional 8,148,915 shares, or 55.51% ofthe Company’s outstanding stock, were issued to Fox Chase MHC, the Company’sfederal chartered holding company. Additionally, the Company contributed $150,000 in cash and issued135,000 shares, or 0.92%, of its outstanding common stock, to the Fox ChaseBank Charitable Foundation.

Fox Chase Bancorp’sbusiness activities are the ownership of Fox Chase Bank’s capital stock and themanagement of the offering proceeds it retained.  Fox Chase Bancorp does not own or lease anyproperty.  Instead, it uses the premises,equipment and other property of Fox Chase Bank. Accordingly, the information set forth in this annual report, includingthe Consolidated Financial Statements and related financial data, relatesprimarily to Fox Chase Bank.  Fox ChaseBancorp is subject to the regulation of the Office of Thrift Supervision.

Fox Chase Bank wasoriginally chartered in 1867 as a Pennsylvania building and loan associationunder the name Fox Chase Building Association No. 2.  In 1910, Fox Chase Bank converted to afederal charter.  On September 29, 2006,Fox Chase Bank converted from the mutual to the mutual holding company form oforganization.  Fox Chase Bank operates asa community-oriented financial institution offering traditional financialservices to consumers and businesses in its market areas.  Fox Chase Bank attracts deposits from thegeneral public and uses those funds to originate one- to four-family real estate,multi-family and commercial real estate, construction, commercial and consumerloans, which, with the exception of long-term fixed-rate one- to four-familyreal estate loans, Fox Chase Bank primarily holds for investment.  Fox Chase Bank also maintains an investmentportfolio.  Fox Chase Bank is regulatedby the Office of Thrift Supervision and its deposits are insured under theDeposit Insurance Fund administered by the Federal Deposit InsuranceCorporation.  Fox Chase Bank is also amember of the Federal Home Loan Bank of Pittsburgh.

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Fox Chase Bank’swebsite address is www.foxchasebank.com. Information on our website should not be considered a part of thisReport.

**MarketAreas**

We areheadquartered in Hatboro, Pennsylvania, which is approximately fifteen milesnorth of Center City, Philadelphia.  Wemaintain two offices in Montgomery County, Pennsylvania, one office inPhiladelphia County, Pennsylvania and three offices in Bucks County,Pennsylvania.  All six of those branchoffices are in the Philadelphia-Camden-Wilmington metropolitan statisticalarea.  In 2000, we also opened twooffices in the southern New Jersey shore area, one in Atlantic County and onein Cape May County.  In March 2006, weopened a branch office in Marmora, New Jersey in Cape May County.  In May 2006, we opened a loan productionoffice with depository capabilities in Exton, Pennsylvania in Chester Countyand in July 2006, we opened a loan production office with depositorycapabilities in Media, Pennsylvania in Delaware County.

***Philadelphia Market Area.***  The economy of our Philadelphia market areais predominated by the service sector. According to published statistics, the population of the three-countyarea served by our branches totaled 2.9 million.  The economy in the Philadelphia market areahas grown in recent years due to the presence of a highly-educated workforceand the diversity of the local economy as traditional employers in themanufacturing and financial services industry have been bolstered by growth inthe life sciences and health care industries as well as the informationtechnology and communication sectors. The median household and per capita income in Bucks and Montgomerycounties significantly exceeds the comparable figures for Pennsylvania as awhole, while the median household and per capita income in Philadelphia countytrailed the comparable figures for Pennsylvania.

***New Jersey Market Area.***** The economy of Atlantic County is dominated bythe service sector, of which the gaming industry in nearby Atlantic City is theprimary employer.  The economy of CapeMay County is primarily geared toward tourism.  According to published statistics, AtlanticCounty’s population in 2005 was approximately 271,000 persons and CapeMay County’s population was approximately 113,000.  The economy in Atlantic County has beenstrong in recent years as new and expanding casinos in Atlantic City along withnew retail centers and entertainment venues have led to job growth and anincrease in housing development.  CapeMay County has also benefited from the growth in and around Atlantic City,as many residents commute into that area for employment.  Although the economy in this market area hasbeen strong in recent years, median household and per capita income in Atlanticand Cape May Counties are lower than the comparable figures for New Jerseyas a whole.  In addition, medianhousehold income in Atlantic County was below the national average in2005.  We attribute this to severalfactors.  First, there has been an influxof retirees with limited incomes but moderate to substantial wealth.Additionally, since this market is located outside of a major metropolitanarea, average income levels are negatively affected by the small portion ofhigh-paying, white collar jobs.  In thismarket area, lower paying service jobs provide a relatively large portion ofoverall employment.

**Competition**

We facesignificant competition for the attraction of deposits and origination ofloans.  Our most direct competition fordeposits has historically come from the several financial institutions operatingin our market areas and, to a lesser extent, from other financial servicecompanies such as brokerage firms, credit unions and insurance companies.  We also face competition for investors’ fundsfrom money market funds, mutual funds and other corporate and governmentsecurities.  At June 30, 2006, which isthe most recent date for which data is available from the Federal DepositInsurance Corporation, we held approximately 0.22% of the deposits inPhiladelphia-Camden-Wilmington metropolitan statistical area, which was the40th largest market share out of the 158 financial institutions with offices inthat metropolitan statistical area.  Inaddition, banks such as Bank of America, Wachovia Bank, Sovereign Bank,Citizens Bank of PA and Commerce Bank also operate in our market areas.  These institutions are significantly largerthan us and, therefore, have significantly greater resources.

Our competitionfor loans comes primarily from financial institutions in our market areas, and,to a lesser extent, from other financial service providers such as mortgagecompanies and mortgage brokers. Competition for loans also comes from the increasing number ofnon-depository financial service companies entering the mortgage and commerciallending markets such as insurance companies, securities companies and specialtyfinance companies.

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We expectcompetition to increase in the future as a result of legislative, regulatoryand technological changes and the continuing trend of consolidation in thefinancial services industry. Technological advances, for example, have lowered the barriers to marketentry, allowed banks and other lenders to expand their geographic reach byproviding services over the Internet and made it possible for non-depositoryinstitutions to offer products and services that traditionally have beenprovided by banks.  Changes in federallaw permit affiliation among banks, securities firms and insurance companies,which promotes a competitive environment in the financial servicesindustry.  Competition for deposits andthe origination of loans could limit our future growth.

**LendingActivities**

***General.***  Except for the sale of longer-term, one- tofour-family residential real estate loans (generally greater than fifteenyears), which we sell in the secondary market, we originate loans primarily forinvestment purposes.  The largestsegments of our loan portfolio are one- to four-family residential real estateloans and home equity loans and lines of credit.  Historically, we originated very little multi-familyand commercial real estate loans, construction loans or commercial loans.  However, in 2003, then-current managementdetermined to emphasize multi-family and commercial real estate lending andconstruction lending, primarily in the southern New Jersey shore area where ithad opened branch offices.  However, dueto a lack of expertise in these types of lending and a relative unfamiliaritywith the market area, the proper documentation on these types of loans was notreceived and many of these loans were criticized or classified in accordancewith regulatory guidelines.  In 2005, newmanagement ceased originating these loans and made significant efforts toreduce these loans made by former management from the portfolio.  We have hired senior management and lenderswith significant commercial lending experience and adopted new commercialcredit policies.  Thus, we plan toemphasize originating multi-family and commercial loans to individuals andbusinesses located in our primary market areas.

***One- to Four-Family Residential Real Estate Loans*.**  The largest segment of our loan portfolio iscomprised of mortgage loans to enable borrowers to purchase or refinanceexisting homes most of which serve as the primary residence of the owner.  We offer fixed-rate and adjustable-rate loans****with terms up to 30 years.  Borrower demand for adjustable-rate loansversus fixed-rate loans is a function of the level of interest rates, theexpectations of changes in the level of interest rates, and the differencebetween the interest rates and loan fees offered for fixed-rate mortgage loansand the initial period interest rates and loan fees for adjustable-rateloans.  The relative amount of fixed-ratemortgage loans and adjustable-rate mortgage loans that can be originated at anytime is largely determined by the demand for each in a competitiveenvironment.  The loan fees, interestrates and other provisions of mortgage loans are determined by us on the basisof our own pricing criteria and competitive market conditions.  Most of our loan originations result fromrelationships with existing or past customers, members of our local communityand referrals from realtors, attorneys and builders.

While one- tofour-family residential real estate loans are normally originated with up to30-year terms, such loans typically remain outstanding for substantiallyshorter periods because borrowers often prepay their loans in full upon sale ofthe property pledged as security or upon refinancing the original loan.  Therefore, average loan maturity is afunction of, among other factors, the level of purchase and sale activity inthe real estate market, prevailing interest rates and the interest ratespayable on outstanding loans. Additionally, our current practice is generally to (1) sell to thesecondary market newly originated longer-term fixed-rate one- to four-familyresidential real estate loans, and (2) to hold in our portfolio shorter-termfixed-rate loans and adjustable-rate loans. Generally, loans are sold to Freddie Mac with servicing retained or toother third parties, without recourse with servicing released.  Occasionally, we have purchased loans andpurchased participation interests in loans originated by other institutions tosupplement our origination efforts.

Interest rates andpayments on our adjustable-rate mortgage loans generally adjust annually afteran initial fixed period of one, three or five years.  Interest rates and payments on theseadjustable-rate loans generally are based on the one-year constant maturityTreasury index.  The maximum amount bywhich the interest rate may be increased is generally two percentage points peradjustment period with a lifetime interest rate cap of six percentage pointsover the initial interest rate of the loan.

We generally donot make conventional loans with loan-to-value ratios exceeding 95% at the timethe loan is originated.  AtDecember 31, 2006, $3.8 million, or 1.3%, of our residential loans, had aloan-to-value ratio exceeding 90% of the loan. Private mortgage insurance is generally required for all loans withloan-to-value ratios in excess of 80%. We require all properties securing mortgage loans to be appraised by aBoard-approved 

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independentappraiser.  We generally require titleinsurance on all first mortgage loans.  Borrowersmust obtain hazard insurance, and flood insurance for loans on propertieslocated in a flood zone, before closing the loan.

In an effort toprovide financing for low- and moderate-income and first-time buyers, we offera special home buyers program.  We offerresidential mortgage loans through this program to qualified individuals andoriginate the loans using reduced interest rates, fees and loan conditions.

***Multi-Family and Commercial Real Estate Loans*.**  We offer fixed-rate and adjustable-rate mortgageloans secured by multi-family and commercial real estate to individuals andsmall businesses in our primary market areas. Our multi-family and commercial real estate loans are generally securedby condominiums, apartment buildings and mixed-use properties with residentialunits, as well as retail space.  Weintend to increase this segment of our loan portfolio.

These loans aretypically repaid or the term extended before maturity, in which case a new rateis negotiated to meet market conditions and an extension of the loan isexecuted for a new term with a new amortization schedule.  We originate multi-family and commercial realestate loans with terms up to 20 years. Interest rates and payments on our adjustable-rate loans generally arebased on the prime interest rate, although our policies permit interest ratesto be based on the Constant Maturity Treasury Index, LIBOR or the federal fundsrate.  Loans are secured by firstmortgages that generally do not exceed 80% of the property’s appraised value.  We require all properties securingmulti-family and commercial real estate loans to be appraised by aBoard-approved independent licensed appraiser. Multi-family and commercial real estate loans also are generallysupported by personal guarantees.

At December 31,2006, the largest outstanding multi-family or commercial real estate loan hadan outstanding balance of $6.0 million and is secured by a hotel in thesouthern New Jersey shore area.  Thisloan was performing according to its original terms at December 31, 2006.

***Construction Loans.***  We originate fixed-rate and adjustable-rateloans to individuals and, to a lesser extent, builders to finance theconstruction of residential dwellings. However, we had no outstanding residential construction loans atDecember 31, 2006.  ** **We also makeconstruction loans for commercial development projects, including apartmentbuildings, restaurants, shopping centers and owner-occupied properties used forbusinesses.  Our construction loansgenerally provide for the payment of interest only during the constructionphase, which is usually six to twelve months for residential properties andeighteen months for commercial properties. At the end of the construction phase, the loan generally converts to apermanent mortgage loan.  Loans generallycan be made with a maximum loan-to-value ratio of 80% on residentialconstruction and 65% on commercial construction at the time the loan isoriginated.  Before making a commitmentto fund a construction loan, we require an appraisal of the property by anindependent licensed appraiser.  We alsowill require an inspection of the property before disbursement of funds duringthe term of the construction loan.

We also originateloans secured by undeveloped land and developed land.  The terms and rates of our land loans are thesame as our multi-family and commercial real estate loans.  Loans secured by undeveloped land or improvedlots generally involve greater risks than residential mortgage lending becauseland loans are more difficult to evaluate. If the estimate of value proves to be inaccurate, in the event ofdefault and foreclosure, we may be confronted with a property the value ofwhich is insufficient to assure full repayment. Loan amounts generally do not exceed 65% (50% for undeveloped land) ofthe lesser of the appraised value or the purchase price.

AtDecember 31, 2006, our largest outstanding commercial construction loanwas for $4.9 million, of which $2.3 million was outstanding.  This loan is secured by land and improvementsin Chester County, Pennsylvania.  Thisloan was performing in accordance with its terms at December 31, 2006.

***Commercial Loans.***  We also offer commercial business loans toprofessionals, sole proprietorships and small businesses in our marketarea.  The maximum amount of ourcommercial loans is limited by our in-house-loans-to one borrower limit.  We intend to grow this segment of our loanportfolio.

We offer securedcommercial term loans, which have a maturity of greater than one year and thepayment of which is dependent on future earnings.  The term for repayment of the loan willnormally be limited to the lesser of the expected useful life of the assetbeing financed or a fixed amount of time, generally less than seven years.  We also offer revolving lines of creditsecured by business assets other than real estate, such as business equipment, 

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inventory and accountsreceivable, letters of credit and demand loans. We originate these loans on both a fixed-rate and adjustable-rate basiswith terms up to 20 years. Adjustable-rate loans are based on the prime rate, although our policiespermit interest rates to be based on the Constant Maturity Treasury Index,LIBOR or the federal funds rate and adjust either monthly or annually.  Where the borrower is a corporation,partnership or other entity, we generally require significant equity holders tobe co-borrowers and in cases where they are not co-borrowers, we generallyrequire personal guarantees from significant equity holders.

We also originatecommercial lines of credit to finance the working capital needs of businessesto be repaid by seasonal cash flows or to provide a period of time during whichthe business can borrow funds for planned equipment purchases.  Commercial lines of credit can be fixed-rateor adjustable-rate loans.  Commerciallines of credit secured by commercial real estate generally have a term of lessthan seven years.

When makingcommercial business loans, we consider the financial statements and/or taxreturns of the borrower, the borrower’s payment history of both corporate andpersonal debt, the debt service capabilities of the borrower, the projectedcash flows of the business, the viability of the industry in which the customeroperates, the value of the collateral and our assessment of management’sability.  Commercial business loans aregenerally secured by a variety of collateral, primarily accounts receivable,inventory and equipment, and are generally supported by personal guarantees.  Depending on the collateral used to securethe loans, commercial loans are made in amounts of up to 80% of the value ofthe collateral securing the loan (90% for established borrowers pledging newequipment).  We generally do not makeunsecured commercial loans.

***Consumer Loans*.**  We offer a variety of consumer loans,including home equity loans and lines of credit, loans secured by certificateof deposits (share loans), automobile loans and unsecured overdraft lines ofcredit.

The procedures forunderwriting consumer loans include an assessment of the applicant’s paymenthistory on other debts and ability to meet existing obligations and payments onthe proposed loan.  Although theapplicant’s creditworthiness is a primary consideration, the underwritingprocess also includes a comparison of the value of the collateral, if any, tothe proposed loan amount.

We generally offerfixed-rate home equity loans with a maximum combined loan-to-value ratio of 90%and adjustable-rate lines of credit with a maximum combined loan-to-value ratioof 80%.  Home equity lines of credit haveadjustable-rates of interest that are based on the prime interest rate.  Home equity lines of credit generally requirethat only interest be paid on a monthly basis and have terms up to 20 years.  Interest rates on these loans typicallyadjust monthly.  We offer fixed-rate andadjustable-rate home equity loans.  Homeequity loans have terms that range from one to 15 years.  We hold a first mortgage position on most ofthe homes that secure our home equity loans and home equity lines of credit.

We also provide aconsumer loan product under which we will originate a fixed-rate oradjustable-rate loan on an owner-occupied one- to four-family residence, with aloan-to-value ratio of 80% of the secured property.  We will then originate a home equity loanwith a loan-to-value ratio of either 10% or 15% of the secured property.  The remaining 10% or 5% must be paid in cashby the borrower.  This product, sometimesreferred to as combination financing or a piggyback loan, eliminates the needfor private mortgage insurance.  However,to obtain this product, the borrower must meet our underwriting criteria withrespect to the one- to four-family residential real estate loan and home equityloan.

We offer loanssecured by new and used automobiles. These loans have fixed interest rates and generally have terms up to sixyears.  We will generally offerautomobile loans with a maximum loan-to-value ratio of 90% of the purchaseprice of the vehicle.

We also offerunsecured overdraft lines of credit to our retail customers for overdraftprotection.  These lines range between$500 and $7,500 and the rate and amounts are offered to customers in relationto their individual credit score.  AtDecember 31, 2006 we had 62 such loans totaling $22,000.

We offer consumerloans secured by certificates of deposit held at Fox Chase Bank with fixedinterest rates and terms up to five years. We will offer such loans up to 90% of the principal balance of thecertificate of deposit. For more information on our loan commitments, see Item7, *“Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Risk Management—LiquidityManagement.”*

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**LoanUnderwriting Risks**

***Adjustable-Rate Loans*. **While we anticipate that adjustable-rateloans will better offset the adverse effects of an increase in interest ratesas compared to fixed-rate mortgages, the increased mortgage payments requiredof adjustable-rate loan borrowers in a rising interest rate environment couldcause an increase in delinquencies and defaults.  The marketability of the underlying propertyalso may be adversely affected in a high interest rate environment.  In addition, although adjustable-ratemortgage loans help make our loan portfolio more responsive to changes ininterest rates, the extent of this interest sensitivity is limited by theannual and lifetime interest rate adjustment limits.

***Multi-Family and Commercial Real Estate Loans.**** *Loanssecured by multi-family and commercial real estate generally have largerbalances and involve a greater degree of risk than one- to four-familyresidential mortgage loans.  Of primaryconcern in multi-family and commercial real estate lending is the borrower’screditworthiness and the feasibility and cash flow potential of theproject.  Payments on loans secured byincome properties often depend on successful operation and management of theproperties.  As a result, repayment ofsuch loans may be subject to a greater extent than residential real estate loansto adverse conditions in the real estate market or the economy. To monitor cashflows on income properties, we generally require borrowers and loan guarantorsto provide annual financial statements and/or tax returns.  In reaching a decision on whether to make amulti-family and commercial real estate loan, we consider the net operatingincome of the property, the borrower’s expertise, credit history andprofitability and the value of the underlying property.  We have generally required that theproperties securing these real estate loans have debt service coverage ratios(the ratio of earnings before debt service to debt service) of at least1.20x.  Environmental surveys andinspections are obtained when circumstances suggest the possibility of thepresence of hazardous materials. Further, in connection with our ongoing monitoring of the loan, we willreview the property at least two times each year.

***Construction Loans*. **Construction financing is generallyconsidered to involve a higher degree of risk of loss than long-term financingon improved, occupied real estate.  Riskof loss on a construction loan depends largely upon the accuracy of the initialestimate of the property’s value at completion of construction and theestimated cost (including interest) of construction.  During the construction phase, a number offactors could result in delays and cost overruns.  If the estimate of construction costs provesto be inaccurate, we may be required to advance funds beyond the amountoriginally committed to permit completion of the building.  If the estimate of value proves to beinaccurate, we may be confronted, at or before the maturity of the loan, with abuilding having a value which is insufficient to assure full repayment.  If we are forced to foreclose on a buildingbefore or at completion due to a default, there can be no assurance that wewill be able to recover all of the unpaid balance of, and accrued interest on,the loan as well as related foreclosure and holding costs.

***Commercial Loans*. **Unlike residential mortgage loans, whichgenerally are made on the basis of the borrower’s ability to make repaymentfrom his or her employment or other income, and which are secured by realproperty the value of which tends to be more easily ascertainable, commercialloans are of higher risk and typically are made on the basis of the borrower’sability to make repayment from the cash flow of the borrower’s business.  As a result, the availability of funds forthe repayment of commercial loans may depend substantially on the success ofthe business itself.  Further, anycollateral securing such loans may depreciate over time, may be difficult toappraise and may fluctuate in value.

***Consumer Loans*. **Consumer loans may entail greater riskthan do residential mortgage loans, particularly in the case of consumer loansthat are unsecured or secured by assets that depreciate rapidly.  In such cases, repossessed collateral for adefaulted consumer loan may not provide an adequate source of repayment for theoutstanding loan and the remaining deficiency often does not warrant furthersubstantial collection efforts against the borrower.  In addition, consumer loan collections dependon the borrower’s continuing financial stability, and therefore are more likelyto be adversely affected by job loss, divorce, illness or personalbankruptcy.  Furthermore, the applicationof various federal and state laws, including bankruptcy and insolvency laws,may limit the amount that can be recovered on such loans.

***Loan Originations, Sales and Participations*.** Loan originations come from a numberof sources.  The primary source of loanoriginations are existing customers, walk-in traffic, advertising and referralsfrom customers.  We advertise innewspapers that are widely circulated throughout our market area.  Accordingly, when our rates are competitive,we attract loans throughout our market areas.

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Before 2006, weoriginated loans for our portfolio. Beginning in 2006, we began selling in the secondary market almost allnewly originated conforming longer-term fixed-rate one- to four-familyresidential real estate loans and holding in our portfolio shorter-termfixed-rate loans and adjustable-rate loans. Our decision to sell loans is basedon prevailing market interest rate conditions and interest rate riskmanagement.  Generally, loans are sold toFreddie Mac with servicing retained or to other third parties without recourse,servicing released.

AtDecember 31, 2006, we were a participating lender on three loans totaling$8.4 million, which are secured by commercial real estate, lease payments andthe assets of the businesses.  Theseloans were being serviced by the lead lender. We also had one loan totaling $10.0 million, $4.0 million of which wassold, servicing released to another lender in 2006.  This loan is secured by a hotel property inthe southern New Jersey shore area and is performing in accordance with theterms of the loan agreement.  We expectin the future that we will continue to sell participation interests to localfinancial institutions, primarily on construction and commercial real estateloans that approach or exceed our lending limits or loans that are outside ofour immediate market areas.  We alsoexpect to continue to purchase participation interests, primarily in commercialand industrial loans, construction loans and commercial real estate loans.  On these participation interests, we wouldperform our own underwriting analysis before purchasing such loans andtherefore believe there would be no greater risk of default on theseobligations.  However, in a purchasedparticipation loan, we would not service the loan and thus are subject to thepolicies and practices of the lead lender with regard to monitoringdelinquencies, pursuing collections and instituting foreclosure proceedings.  In assessing whether to participate, we wouldrequire review of all of the documentation relating to any loan in which weparticipate, including any annual financial statements provided by aborrower.  Additionally, we would requireperiodic updates on the loan from the lead lender.

We have nothistorically purchased any whole loans. However, we would entertain doing so if a loan was presented to us thatmet our underwriting criteria and fit within our interest rate strategy.

***Loan Approval Procedures and Authority*.** Our lending activities follow written,non-discriminatory, underwriting standards and loan origination proceduresestablished by our board of directors and management.  The board has granted authority to approveresidential and consumer loans up to $300,000 to the Assistant Manager of theConsumer Lending Department and up to $450,000 to the Vice President ofResidential Mortgage and the Vice President of Consumer Lending.  Loans in excess of these amounts up to $3.0million require the approval by the Officers Loan Committee, consisting of thePresident and Chief Executive Officer, the Chief Financial Officer, the ChiefCredit Officer and the Chief Lending Officer and other experienced lenders andofficers as appointed by the Board from time to time.

The Board hasgranted authority to approve commercial loans to certain employees up toprescribed limits, depending on the officer’s experience and tenure.  The Board also granted loan approvalauthority to the Officers Loan Committee, consisting of the President and ChiefExecutive Officer, the Chief Financial Officer, the Chief Credit Officer andthe Chief Lending Officer and other experienced lenders and officers asappointed by the Board from time to time. Commercial loans in excess of $4.5 million require the approval of theExecutive Committee of the Board of Directors.

***Loans to One Borrower*.**   The maximum amount that we may lend to oneborrower and the borrower’s related entities generally is limited, byregulation, to 15% of our stated capital and reserves.  At December 31, 2006, our generalregulatory limit on loans to one borrower was $14.5 million.  At that date, our largest lendingrelationship was a $6.0 million loan secured by a hotel in the southern NewJersey shore area.  This loan wasperforming according to its terms at December 31, 2006.  At December 31, 2006, our second largestlending relationship consisted of three loans to one borrower totaling$4.3  million.  All three of the loans were secured bycommercial real estate, two in the Philadelphia metropolitan area and one inthe southern New Jersey shore area.  Allthree loans were performing according to their terms on December 31, 2006.

***Loan Commitments*.**  We issue commitments for fixed- andadjustable-rate mortgage loans conditioned upon the occurrence of certainevents.  Commitments to originatemortgage loans are legally binding agreements to lend to our customers.  Generally, our mortgage loan commitmentsexpire after 30 days.

 

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**InvestmentActivities**

The Board ofDirectors reviews and approves our investment policy annually.  The Risk Management Committee of the Board ofDirectors is responsible for establishing policies for conducting investmentactivities, including the establishment of risk limits.  The Risk Management Committee of the Board ofDirectors reviews investment transactions on a monthly basis and monitors thecomposition and performance of the investment portfolio on a quarterlybasis.  The Board has directed the ChiefFinancial Officer to implement the investment policy.

The investmentportfolio is primarily viewed as a source of liquidity.  The investment portfolio management policy isdesigned to:

1.                                       absorb funds when loan demand and depositoutflows are low and infuse funds into loans when loan demand is high and tofund deposit outflows;

2.                                       generate a favorable return on investments;

3.                                       provide income consistent with our liquidityand safety requirements, while providing a suitable balance of quality anddiversification to our balance sheet;

4.                                       have collateral available for pledgingrequirements; and

5.                                       provide a medium for the implementation ofcertain interest rate risk management measures intended to establish and maintain an appropriate balance between thesensitivity to changes in interest rates.

 

We have authorityto invest in various types of liquid assets, including U.S. Treasuryobligations, securities of various federal agencies and municipal governments,mortgage and asset-backed securities, corporate debt instruments, trustpreferred securities and certificates of deposit of federally insuredinstitutions.  Within certain regulatorylimits, we also may invest a percentage of our capital in mutual funds.  We also are required to maintain aninvestment in Federal Home Loan Bank of Pittsburgh stock.  While we have the authority under applicablelaw to invest in derivative securities, our investment policy does notpresently permit this investment.  We hadno investments in derivative securities at December 31, 2006.

AtDecember 31, 2006, our investment portfolio totaled $228.4 million andconsisted primarily of mortgage-backed securities issued by Fannie Mae, FreddieMac and Ginnie Mae, securities of municipal governments and corporate debtsecurities.  Corporate debt securities,such as bonds, notes and commercial paper, are obligations of a company to payholders a fixed amount, with interest, over a predetermined period oftime.  Such investments tend to carry ahigher rate of interest compared to other fixed income instruments, likecertificates of deposit and U.S. Treasury securities, which offsets theadditional risk of these investments, which are not backed by any government oragency guarantee.  Also, corporate debtsecurities are available with different maturity dates, issuers and rates ofinterest, which allows us flexibility in structuring our portfolio.  At December 31, 2006, we held $1.7million in private issued mortgage-backed securities.  Private issued mortgage-backed securities are“whole loan collateralized mortgage securities” that are formed from jumbomortgages that have all the same characteristics of conforming mortgages,except for their size, issued by agency guarantors.  To make up for the lack of an agencyguarantor, whole loans are structured with subordinated tranches designed toachieve a triple A rating by a major rating service.  The investor pays a lower price for thesecurity but receives a higher yield.

**DepositActivities and Other Sources of Funds**

***General*.**  Deposits and loan repayments are the majorsources of our funds for lending and other investment purposes.  Loan repayments are a relatively stablesource of funds, while deposit inflows and outflows and loan prepayments aresignificantly influenced by general interest rates and money market conditions.

***Deposit Accounts*.**  Substantially all of our depositors areresidents of the Commonwealth of Pennsylvania and the State of New Jersey.  We attract deposits in our market areathrough advertising and through the offering a broad selection of depositinstruments, including noninterest-bearing demand accounts (such as checkingaccounts), interest-bearing accounts (such as NOW and money market accounts),regular savings accounts and certificates of 

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deposit.  At December 31, 2006, we did not utilizebrokered deposits.   However, ourliquidity policy provides for the use of brokered deposits as an alternativesource of funds.  Deposit account termsvary according to the minimum balance required, the time periods the funds mustremain on deposit and the interest rate, among other factors.  In determining the terms of our depositaccounts, we consider the rates offered by our competition, our liquidityneeds, profitability to us, matching deposit and loan products and customerpreferences and concerns.  We generallyreview our deposit mix and pricing weekly. Historically, our strategy was to offer competitive rates and to be themarket leader for rates on certain deposit products.  Our current strategy is to offer competitiverates and to be in the middle to upper end of the market for rates on a varietyof deposit products.

We also offer avariety of deposit accounts designed for the businesses operating in our marketarea.  Our business banking depositproducts include a commercial checking account and a checking accountspecifically designed for small businesses. Additionally, we offer sweep accounts and money market accounts forbusinesses.  We are seeking to increaseour commercial deposits through the offering of these products.

***Borrowings*.**  In recent years, we have not relied uponadvances from the Federal Home Loan Bank of Pittsburgh to supplement our supplyof lendable funds or to meet deposit withdrawal requirements.  The $30.0 million of Federal Home Loan Bankadvances outstanding at December 31, 2006 were borrowed in 2001.  We may rely more heavily on wholesale fundingin addition to retail funds to leverage the balance sheet and accelerategrowth.  However, due to the potentialvolatility of wholesale funding, we have developed ratios and limits to measureour exposure to wholesale funding.

The Federal HomeLoan Bank functions as a central reserve bank providing credit for its memberfinancial institutions.  As a member, weare required to own capital stock in the Federal Home Loan Bank and areauthorized to apply for advances on the security of such stock and certain ofour whole first mortgage loans and other assets (principally securities whichare obligations of, or guaranteed by, the United States), provided certainstandards related to creditworthiness have been met.  Advances are made under several differentprograms, each having its own interest rate and range of maturities.  Depending on the program, limitations on theamount of advances are based either on a fixed percentage of an institution’snet worth or on the Federal Home Loan Bank’s assessment of the institution’screditworthiness.

**Personnel**

As ofDecember 31, 2006, we had 131 full-time employees and 20 part-timeemployees. We believe our relationship with our employees is good.

**Subsidiaries**

Fox Chase Bank’sonly active subsidiary is Fox Chase Financial, Inc., which was formed inFebruary 1999. As a Delaware-chartered corporation investment company, FoxChase Financial’s purpose is to manage and hold investment securities.

**REGULATION AND SUPERVISION**

**General**

Fox Chase Bancorp,as a federally chartered corporation, is subject to reporting to and regulationby the Office of Thrift Supervision.  FoxChase Bancorp also is subject to the rules and regulations of the Securitiesand Exchange Commission under the federal securities laws.  Fox Chase Bank is subject to extensiveregulation, examination and supervision by the Office of Thrift Supervision, asits primary federal regulator, and the Federal Deposit Insurance Corporation,as its deposits insurer.  Fox Chase Bankis a member of the Federal Home Loan Bank System and its deposit accounts areinsured up to applicable limits by the Deposit Insurance Fund managed by theFederal Deposit Insurance Corporation.  FoxChase Bank must file reports with the Office of Thrift Supervision and theFederal Deposit Insurance Corporation concerning its activities and financialcondition in addition to obtaining regulatory approvals prior to entering intocertain transactions such as mergers with, or acquisitions of, other financialinstitutions.  The Office of ThriftSupervision and/or the Federal Deposit Insurance Corporation conduct periodicexaminations to test Fox Chase Bank’s safety and soundness and compliance withvarious regulatory requirements.  Thisregulation and supervision establishes a comprehensive framework of activitiesin which an institution can engage and is intended primarily for the protectionof the insurance fund and depositors.  As

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a federal mutualholding company, Fox Chase MHC is also required by federal law to report to,and otherwise comply with the rules and regulations of, the Office of ThriftSupervision.  The regulatory structurealso gives the regulatory authorities extensive discretion in connection with theirsupervisory and enforcement activities and examination policies, includingpolicies with respect to the classification of assets and the establishment ofadequate loan loss reserves for regulatory purposes.  Any change in such policies, whether by theOffice of Thrift Supervision, the Federal Deposit Insurance Corporation orCongress, could have a material adverse impact on Fox Chase Bancorp, Fox ChaseMHC and Fox Chase Bank and their operations.

Certain of theregulatory requirements that are applicable to Fox Chase Bank, Fox ChaseBancorp and Fox Chase MHC are described below or elsewhere in thisdocument.  The description of statutoryprovisions and regulations applicable to savings institutions and their holdingcompanies set forth below and elsewhere in this document does not purport to bea complete description of such statutes and regulations and their effects onFox Chase Bank, Fox Chase Bancorp and Fox Chase MHC and is qualified in itsentirety by reference to the actual statutes and regulations.

**Regulationof Federal Savings Associations**

***Business Activities. ***Federallaw and regulations govern the activities of federal savings banks, such as FoxChase Bank.  These laws and regulationsdelineate the nature and extent of the activities in which federal savingsbanks may engage.  In particular, certainlending authority for federal savings banks, *e.g.*,commercial, non-residential real property loans and consumer loans, is limitedto a specified percentage of the institution’s capital or assets.

***Capital Requirements.*** The Office of Thrift Supervision’s capitalregulations require federal savings institutions to meet three minimum capitalstandards:  a 1.5% tangible capital tototal assets ratio, a 4% leverage ratio (3% for institutions receiving the highestrating on the CAMELS examination rating system) and an 8% risk-based capitalratio.  In addition, the promptcorrective action standards discussed below also establish, in effect, aminimum 2% tangible capital standard, a 4% leverage ratio (3% for institutionsreceiving the highest rating on the CAMELS system) and, together with therisk-based capital standard itself, a 4% Tier 1 risk-based capitalstandard.  The Office of ThriftSupervision regulations also require that, in meeting the tangible, leverageand risk-based capital standards, institutions must generally deductinvestments in and loans to subsidiaries engaged in activities that are notpermissible for a national bank.

The risk-basedcapital standard requires federal savings institutions to maintain Tier 1(core) and total capital (which is defined as core capital and supplementarycapital) to risk-weighted assets of at least 4% and 8%, respectively.  In determining the amount of risk-weightedassets, all assets, including certain off-balance sheet assets, recourseobligations, residual interests and direct credit substitutes, are multipliedby a risk-weight factor of 0% to 100%, assigned by the Office of ThriftSupervision capital regulation based on the risks believed inherent in the typeof asset.  Core (Tier 1) capital isgenerally defined as common stockholders’ equity (including retained earnings),certain noncumulative perpetual preferred stock and related surplus andminority interests in equity accounts of consolidated subsidiaries lessintangibles other than certain mortgage servicing rights and credit cardrelationships.  The components ofsupplementary (Tier 2) capital currently include cumulative preferred stock,long-term perpetual preferred stock, mandatory convertible securities,subordinated debt and intermediate preferred stock, the allowance for loan andlease losses limited to a maximum of 1.25% of risk-weighted assets and up to45% of unrealized gains on available-for-sale equity securities with readilydeterminable fair market values. Overall, the amount of supplementary capital included as part of totalcapital cannot exceed 100% of core capital.

The Office ofThrift Supervision also has authority to establish individual minimum capitalrequirements in appropriate cases upon a determination that an institution’scapital level is or may become inadequate in light of the particularcircumstances.  At December 31,2006, Fox Chase Bank met each of these capital requirements.

***Prompt Corrective Regulatory Action. ***The Office of ThriftSupervision is required to take certain supervisory actions againstundercapitalized institutions, the severity of which depends upon theinstitution’s degree of undercapitalization. Generally, a savings institution that has a ratio of total capital torisk weighted assets of less than 8%, a ratio of Tier 1 (core) capital torisk-weighted assets of less than 4% or a ratio of core capital to total assetsof less than 4% (3% or less for institutions with the highest examinationrating) is considered to be “undercapitalized.” A savings institution that has a total risk-based capital ratio lessthan 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that isless than 3% is considered to be “significantly undercapitalized” and a 

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savings institutionthat has a tangible capital to assets ratio equal to or less than 2% is deemedto be “critically undercapitalized.” Subject to a narrow exception, the Office of Thrift Supervision isrequired to appoint a receiver or conservator within specified time frames foran institution that is “critically undercapitalized.”  The regulation also provides that a capitalrestoration plan must be filed with the Office of Thrift Supervision within 45days of the date a savings institution is deemed to have received notice thatit is “undercapitalized,” “significantly undercapitalized” or “criticallyundercapitalized.”  Compliance with theplan must be guaranteed by any parent holding company in an amount of up to thelessor of 5% of the savings institution’s total assets when it was deemed to beundercapitalized or the amount necessary to achieve compliance with applicablecapital regulations.  In addition,numerous mandatory supervisory actions become immediately applicable to anundercapitalized institution, including, but not limited to, increasedmonitoring by regulators and restrictions on growth, capital distributions andexpansion.  The Office of ThriftSupervision could also take any one of a number of discretionary supervisoryactions, including the issuance of a capital directive and the replacement ofsenior executive officers and directors. “Significantly undercapitalized” and “critically undercapitalized”institutions are subject to more extensive mandatory regulatory actions.

***Loans to One Borrower. ***Federal law provides that savings institutions aregenerally subject to the limits on loans to one borrower applicable to nationalbanks.  Subject to certain exceptions,savings institution may not make a loan or extend credit to a single or relatedgroup of borrowers in excess of 15% of its unimpaired capital and surplus.  An additional amount may be lent, equal to10% of unimpaired capital and surplus, if secured by specifiedreadily-marketable collateral.

***Standards for Safety and Soundness. ***The federal bankingagencies have adopted Interagency Guidelines prescribing Standards for Safetyand Soundness.  The guidelines set forththe safety and soundness standards that the federal banking agencies use toidentify and address problems at insured depository institutions before capitalbecomes impaired.  If the Office ofThrift Supervision determines that a savings institution fails to meet anystandard prescribed by the guidelines, the Office of Thrift Supervision may requirethe institution to submit an acceptable plan to achieve compliance with thestandard.

***Limitation on Capital Distributions. ***Office of ThriftSupervision regulations impose limitations upon all capital distributions by asavings institution, including cash dividends, payments to repurchase itsshares and payments to stockholders of another institution in a cash-outmerger.  Under the regulations, anapplication to and the prior approval of the Office of Thrift Supervision isrequired before any capital distribution if the institution does not meet thecriteria for “expedited treatment” of applications under Office of ThriftSupervision regulations (*i.e.*,generally, examination and Community Reinvestment Act ratings in the two topcategories), the total capital distributions for the calendar year exceed netincome for that year plus the amount of retained net income for the precedingtwo years, the institution would be undercapitalized following the distributionor the distribution would otherwise be contrary to a statute, regulation oragreement with the Office of Thrift Supervision.  If an application is not required, theinstitution must still provide prior notice to the Office of Thrift Supervisionof the capital distribution if, like Fox Chase Bank, it is a subsidiary of aholding company.  If Fox Chase Bank’scapital were ever to fall below its regulatory requirements or the Office ofThrift Supervision notified it that it was in need of increased supervision,Fox Chase Bank’s ability to make capital distributions could berestricted.  In addition, the Office ofThrift Supervision could prohibit a proposed capital distribution by anyinstitution, which would otherwise be permitted by the regulation, if theOffice of Thrift Supervision determines that such distribution would constitutean unsafe or unsound practice.

***Qualified Thrift Lender Test. ***Federal law requiressavings institutions to meet a qualified thrift lender test.  Under the test, a savings institution isrequired to either qualify as a “domestic building and loan association” underthe Internal Revenue Code or maintain at least 65% of its “portfolio assets”(total assets less: (i) specified liquid assets up to 20% of total assets; (ii)intangibles, including goodwill; and (iii) the value of property used toconduct business) in certain “qualified thrift investments” (primarilyresidential mortgages and related investments, including certainmortgage-backed securities) in at least 9 months out of each 12-monthperiod.  Legislation has expanded theextent to which education loans, credit card loans and small business loans maybe considered “qualified thrift investments.”

A savingsinstitution that fails the qualified thrift lender test is subject to certainoperating restrictions and may be required to convert to a bank charter.  As of December 31, 2006, Fox Chase Bankmaintained  81.5% of its portfolio assetsin qualified thrift investments and, therefore, met the qualified thrift lendertest.

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***Transactions with Related Parties.***  Fox Chase Bank’s authority to engage intransactions with “affiliates” (*e.g.,* anyentity that controls or is under common control with an institution, includingFox Chase MHC and Fox Chase Bancorp and its non-savings institutionsubsidiaries) is limited by federal law. The aggregate amount of covered transactions with any individualaffiliate is limited to 10% of the capital and surplus of the savingsinstitution.  The aggregate amount ofcovered transactions with all affiliates is limited to 20% of the savingsinstitution’s capital and surplus. Certain transactions with affiliates are required to be secured bycollateral in an amount and of a type specified in federal law.  The purchase of low quality assets fromaffiliates is generally prohibited. Transactions with affiliates must be on terms and under circumstancesthat are at least as favorable to the institution as those prevailing at thetime for comparable transactions with non-affiliated companies.  In addition, savings institutions areprohibited from lending to any affiliate that is engaged in activities that arenot permissible for bank holding companies and no savings institution maypurchase the securities of any affiliate other than a subsidiary.

The Sarbanes-OxleyAct of 2002 generally prohibits loans by Fox Chase Bancorp to its executiveofficers and directors.  However, theSarbanes-Oxley Act contains a specific exemption from such prohibition forloans by Fox Chase Bank to its executive officers and directors in compliancewith federal banking laws.  Under suchlaws, Fox Chase Bank’s authority to extend credit to executive officers,directors and 10% shareholders (“insiders”), as well as entities such personscontrol, is limited.  The law limits boththe individual and aggregate amount of loans Fox Chase Bank may make toinsiders based, in part, on Fox Chase Bank’s capital position and requirescertain board approval procedures to be followed.  Such loans are required to be made on termssubstantially the same as those offered to unaffiliated individuals and notinvolve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit orcompensation program that is widely available to all employees of theinstitution and does not give preference to insiders over other employees.

***Enforcement. ***TheOffice of Thrift Supervision has primary enforcement responsibility overfederal savings institutions and has the authority to bring actions against theinstitution and all institution-affiliated parties, including stockholders, andany attorneys, appraisers and accountants who knowingly or recklesslyparticipate in wrongful action likely to have an adverse effect on an insuredinstitution.  Formal enforcement actionmay range from the issuance of a capital directive or cease and desist order toremoval of officers and/or directors to institution of receivership,conservatorship or termination of deposit insurance.  Civil penalties cover a wide range ofviolations and can amount to $25,000 per day, or even $1 million per day inespecially egregious cases.  The FederalDeposit Insurance Corporation has authority to recommend to the Director of theOffice of Thrift Supervision that enforcement action be taken with respect to aparticular savings institution.  Ifaction is not taken by the Director, the Federal Deposit Insurance Corporationhas authority to take such action under certain circumstances.  Federal law also establishes criminalpenalties for certain violations.

***Assessments. ***Federalsavings banks are required to pay assessments to the Office of ThriftSupervision to fund the agency’s operations. The general assessments, paid on a semi-annual basis, are based upon thesavings institution’s (including consolidated subsidiaries) total assets,condition and complexity of portfolio. The Office of Thrift Supervision assessments paid by Fox Chase Bank forthe year ended December 31, 2006 totaled $212,000.

***Insurance of Deposit Accounts.***   Fox Chase Bank’s deposits are insured up toapplicable limits by the Deposit Insurance Fund of the Federal DepositInsurance Corporation.  The DepositInsurance Fund is the successor to the Bank Insurance Fund and the SavingsAssociation Insurance Fund, which were merged in 2006.  The Federal Deposit Insurance Corporationrecently amended its risk-based assessment system for 2007 to implementauthority granted by the Federal Deposit Insurance Reform Act of 2005 (the “ReformAct”).  Under the revised system, insuredinstitutions are assigned to one of four risk categories based on supervisoryevaluations, regulatory capital levels and certain other factors.  An institution’s assessment rate depends uponthe category to which it is assigned. Risk category I, which contains the least risky depository institutions,is expected to include more than 90% of all institutions.  Unlike the other categories, Risk Category Icontains further risk differentiation based on the Federal Deposit InsuranceCorporation’s analysis of financial ratios, examination component ratings andother information.  Assessment rates aredetermined by the Federal Deposit Insurance Corporation and currently rangefrom five to seven basis points for the healthiest institutions (Risk CategoryI) to 43 basis points of assessable deposits for the riskiest (Risk CategoryIV).  The Federal Deposit InsuranceCorporation may adjust rates uniformly from one quarter to the next, exceptthat no single adjustment can exceed three basis points.

The Reform Actalso provided for a one-time credit for eligible institutions based on theirassessment base as of December 31, 1996. Subject to certain limitations with respect to institutions that areexhibiting weaknesses, 

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credits can be used tooffset assessments until exhausted.  FoxChase Bank’s one-time credit is expected to approximate $588,000.  The Reform Act also provided for the possibilitythat the Federal Deposit Insurance Corporation may pay dividends to insuredinstitutions once the Deposit Insurance Fund reserve ratio equals or exceeds1.35% of estimated insured deposits.

In addition to theassessment for deposit insurance, institutions are required to make payments onbonds issued in the late 1980s by the Financing Corporation to recapitalize apredecessor deposit insurance fund.  Thispayment is established quarterly and during the calendar year ended December31, 2006 averaged 1.28 basis points of assessable deposits.

The Reform Actprovided the Federal Deposit Insurance Corporation with authority to adjust theDeposit Insurance Fund ratio to insured deposits within a range of 1.15% and1.50%, in contrast to the prior statutorily fixed ratio of 1.25%.  The ratio, which is viewed by the FederalDeposit Insurance Corporation as the level that the fund should achieve, wasestablished by the agency at 1.25% for 2007.

The FederalDeposit Insurance Corporation has authority to increase insuranceassessments.  A significant increase ininsurance premiums would likely have an adverse effect on our operatingexpenses and results of operations. Management cannot predict what insurance assessment rates will be in thefuture.

Insurance of depositsmay be terminated by the Federal Deposit Insurance Corporation upon a findingthat the institution has engaged in unsafe or unsound practices, is in anunsafe or unsound condition to continue operations or has violated anyapplicable law, regulation, rule, order or condition imposed by the FederalDeposit Insurance Corporation or the Office of Thrift Supervision.  The management of Fox Chase Bank does notknow of any practice, condition or violation that might lead to termination ofdeposit insurance.

***Federal Home Loan Bank System. ***Fox Chase Bank is amember of the Federal Home Loan Bank System, which consists of 12 regionalFederal Home Loan Banks.  The FederalHome Loan Bank provides a central credit facility primarily for memberinstitutions.  Fox Chase Bank, as amember of the Federal Home Loan Bank of Pittsburgh, is required to acquire andhold shares of capital stock in that Federal Home Loan Bank.  Fox Chase Bank was in compliance with thisrequirement with an investment in Federal Home Loan Bank stock atDecember 31, 2006 of $4.4 million.

The Federal HomeLoan Banks were required to provide funds for the resolution of insolventthrifts in the late 1980s and are required to contribute funds for affordablehousing programs.  These requirementscould reduce the amount of dividends that the Federal Home Loan Banks pay totheir members and could also result in the Federal Home Loan Banks imposing ahigher rate of interest on advances to their members.  If dividends were reduced, or interest onfuture Federal Home Loan Bank advances increased, our net interest income wouldlikely also be reduced.

***Federal ReserveSystem. ***TheFederal Reserve Board regulations require savings institutions to maintainnoninterest earning reserves against their transaction accounts (primarilyNegotiable Order of Withdrawal (NOW) and regular checking accounts).  The regulations generally provide thatreserves be maintained against aggregate transaction accounts as follows:  a 3% reserve ratio is assessed on nettransaction accounts up to and including $45.8 million; a 10% reserve ratio isapplied above $45.8 million.  The first$8.5 million of otherwise reservable balances are exempted from the reserverequirements.  The amounts are adjustedannually.  Fox Chase Bank complies withthe foregoing requirements.

**HoldingCompany Regulation**

***General. ***FoxChase Bancorp and Fox Chase MHC are savings and loan holding companies withinthe meaning of federal law.  As such,they are registered with the Office of Thrift Supervision and are subject toOffice of Thrift Supervision regulations, examinations, supervision, reportingrequirements.  In addition, the Office ofThrift Supervision has enforcement authority over Fox Chase Bancorp and FoxChase MHC and their non-savings institution subsidiaries.  Among other things, this authority permitsthe Office of Thrift Supervision to restrict or prohibit activities that aredetermined to be a serious risk to Fox Chase Bank.

***Activities******Restrictions Applicable to MutualHolding Companies. ***Pursuantto federal law and Office of Thrift Supervision regulations, a mutual holdingcompany, such as Fox Chase MHC, may engage in the following 

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activities:  (i) investing in the stock of a savingsassociation; (ii) acquiring a mutual association through the merger of suchassociation into a savings association subsidiary of such holding company or aninterim savings association subsidiary of such holding company; (iii) mergingwith or acquiring another holding company, one of whose subsidiaries is asavings association; (iv) investing in a corporation, the capital stock ofwhich is available for purchase by a savings association under federal law orunder the law of any state where the subsidiary savings association orassociations share their home offices; (v) furnishing or performing managementservices for a savings association subsidiary of such company; (vi) holding,managing or liquidating assets owned or acquired from a savings subsidiary ofsuch company; (vii) holding or managing properties used or occupied by asavings association subsidiary of such company properties used or occupied by asavings association subsidiary of such company; (viii) acting as trustee underdeeds of trust; (ix) any other activity (A) that the Federal Reserve Board, byregulation, has determined to be permissible for bank holding companies underSection 4(c) of the Bank Holding Company Act, unless the Office of ThriftSupervision, by regulation, prohibits or limits any such activity for savingsand loan holding companies or (B) in which multiple savings and loan holdingcompanies were authorized (by regulation) to directly engage on March 5, 1987;and (x) purchasing, holding, or disposing of stock acquired in connection witha qualified stock issuance if the purchase of such stock by such savings andloan holding company is approved by the Office of Thrift Supervision.

The Gramm-LeachBliley Act of 1999 was designed to modernize the regulation of the financialservices industry by expanding the ability of bank holding companies to affiliatewith other types of financial services companies such as insurance companiesand investment banking companies.  Thelegislation also expanded the activities permitted for mutual savings and loanholding companies to also include any activity permitted a “financial holdingcompany” under the legislation, including a broad array of insurance andsecurities activities.

Federal lawprohibits a savings and loan holding company, including a federal mutualholding company, from, directly or indirectly or through one or moresubsidiaries, acquiring more than 5% of the voting stock of another savingsinstitution, or holding company thereof, without prior written approval of theOffice of Thrift Supervision.  Federallaw also prohibits a savings and loan holding company from acquiring orretaining, with certain exceptions, more than 5% of a non-subsidiary holdingcompany or savings association.  Asavings and loan holding company is also prohibited from acquiring more than 5%of a company engaged in activities other than those authorized by federal law;or acquiring or retaining control of a depository institution that is notinsured by the Federal Deposit Insurance Corporation.   In evaluating applications by holding companiesto acquire savings institutions, the Office of Thrift Supervision must considerthe financial and managerial resources and future prospects of the company andinstitution involved, the effect of the acquisition on the risk to theinsurance funds, the convenience and needs of the community and competitivefactors.

The Office ofThrift Supervision is prohibited from approving any acquisition that wouldresult in a multiple savings and loan holding company controlling savingsinstitutions in more than one state, except: (i) the approval of interstate supervisory acquisitions by savings andloan holding companies, and (ii) the acquisition of a savings association inanother state if the laws of the state of the target savings institutionspecifically permit such acquisitions. The states vary in the extent to which they permit interstate savingsand loan holding company acquisitions.

If the savingsinstitution subsidiary of a savings and loan holding company fails to meet thequalified thrift lender test set forth in federal law, the holding company mustregister with the Federal Reserve Board as a bank holding company within oneyear of the savings institution’s failure to so qualify.

Although savingsand loan holding companies are not currently subject to regulatory capitalrequirements or specific restrictions on the payment of dividends or othercapital distributions, federal regulations do prescribe such restrictions onsubsidiary savings institutions.  FoxChase Bank must notify the Office of Thrift Supervision 30 days beforedeclaring any dividend.  In addition, thefinancial impact of a holding company on its subsidiary institution is a matterthat is evaluated by the Office of Thrift Supervision and the agency hasauthority to order cessation of activities or divestiture of subsidiaries deemedto pose a threat to the safety and soundness of the institution.

***Stock Holding Company Subsidiary Regulation. ***The Office of ThriftSupervision has adopted regulations governing the two-tier mutual holdingcompany form of organization and subsidiary stock holding companies that arecontrolled by mutual holding companies. Fox Chase Bancorp is the stock holding company subsidiary of Fox ChaseMHC.  Fox Chase Bancorp is permitted toengage in activities that are permitted for Fox Chase MHC subject 

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to the samerestrictions and conditions.  Finally,the Office of Thrift Supervision regulations maintain that the stock holdingcompany subsidiary must be federally chartered for supervisory reasons.

***Waivers of Dividends by Fox Chase MHC. ***Office of Thrift Supervisionregulations require Fox Chase MHC to notify the Office of Thrift Supervision ifit proposes to waive receipt of dividends from Fox Chase Bancorp.  The Office of Thrift Supervision reviewsdividend waiver notices on a case-by-case basis, and, in general, does notobject to any such waiver if:  (i) thewaiver would not be detrimental to the safe and sound operation of the savingsinstitution; and (ii) the mutual holding company’s board of directorsdetermines that such waiver is consistent with such directors’ fiduciary dutiesto the mutual holding company’s members.

***Conversion of Fox Chase MHC to Stock Form. ***Office of ThriftSupervision regulations permit Fox Chase MHC to convert from the mutual form oforganization to the capital stock form of organization. There can be noassurance when, if ever, a conversion transaction will occur, and the Board ofDirectors has no current intention or plan to undertake a conversiontransaction.  In a conversiontransaction, a new holding company would be formed as the successor to FoxChase Bancorp, Fox Chase MHC’s corporate existence would end, and certaindepositors of Fox Chase Bank would receive the right to subscribe foradditional shares of the new holding company. In a conversion transaction, each share of common stock held bystockholders other than Fox Chase MHC would be automatically converted into anumber of shares of common stock of the new holding company based on anexchange ratio determined at the time of conversion that ensures thatstockholders other than Fox Chase MHC own the same percentage of common stockin the new holding company as they owned in Fox Chase Bancorp immediatelybefore conversion.  The total number ofshares held by stockholders other than Fox Chase MHC after a conversion transactionwould be increased by any purchases by such stockholders in the stock offeringconducted as part of the conversion transaction.

***Acquisition of Control. ***Under the federal Change in Bank Control Act, anotice must be submitted to the Office of Thrift Supervision if any person(including a company), or group acting in concert, seeks to acquire “control”of a savings and loan holding company or savings institution.  Under certain circumstances, a change incontrol may occur, and prior notice is required, upon the acquisition of 10% ormore of the outstanding voting stock of the savings and loan holding company orsavings institutions unless the Office of Thrift Supervision has found that theacquisition will not result in a change in control of the company.  Under the Change in Bank Control Act, theOffice of Thrift Supervision has 60 days from the filing of a complete noticeto act, taking into consideration certain factors, including the financial andmanagerial resources of the acquirer and the anti-trust effects of theacquisition.  Any company that soacquires control would then be subject to regulation as a savings and loanholding company.

# **EXECUTIVEOFFICERS OF THE REGISTRANT**

The Board of Directorsannually elects the executive officers of Fox Chase MHC, Fox Chase Bancorp andFox Chase Bank, who serve at the Board’s discretion.  Our executive officers are:

 

| Name              | ** ** | **Position**                                                                                                                                                 |
|-------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **        | ** ** | ** **                                                                                                                                                   |
| Thomas M. Petro   |       | President and Chief Executive Officer of Fox Chase  Bancorp, Inc., Fox Chase MHC and Fox Chase Bank                                                          |
|              |       |                                                                                                                                                         |
| Jerry D. Holbrook |       | Chief Financial Officer and Secretary of Fox Chase  Bancorp, Inc. and Fox Chase MHC; Executive Vice  President and Chief Financial Officer of Fox Chase Bank |
|              |       |                                                                                                                                                         |
| Keiron G. Lynch   |       | Executive Vice President and Chief Administrative  Officer of Fox Chase Bank                                                                                 |
|              |       |                                                                                                                                                         |
| David C. Kowalek  |       | Executive Vice President and Chief Credit Officer of  Fox Chase Bank                                                                                         |

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|                       |   |                                                                          |
|-----------------------|--------|-------------------------------------------------------------------------------|
| James V. Schermerhorn |   | Executive Vice President and Chief Lending Officer  of Fox Chase Bank

  |
|                  |   |                                                                          |
| Richard J. Fuchs      |   | Executive Vice President of Retail Banking of Fox  Chase Bank                 |

 

Below isinformation regarding our executive officers who are not also directors.  Unless otherwise stated, each executiveofficer has held his or her current position for at least the last fiveyears.  Ages presented are as ofDecember 31, 2006.

*JerryD. Holbrook,*CMA, has served as Executive Vice President andChief Financial Officer since 2005. From 2003 to 2005, Mr. Holbrook wasExecutive Vice President, Chief Financial Officer and Corporate Secretary forNortheast Pennsylvania Financial Corp. and its principal subsidiary FirstFederal Bank, a public thrift institution. Previously, Mr. Holbrook servedas Chief Financial Officer for E-Duction, Inc., a financial services start-up.Previously, he was Senior Vice President of Finance at First USA Bank (now partof J.P. Morgan Chase) where he managed the asset/liability management committeeand was responsible for securitization planning and debt issuances for a $70billion credit card portfolio. He began his banking career with WSFS FinancialCorp. where he served as Senior Vice President and Controller.Mr. Holbrook holds a B.S. in Accounting from the University of Kentucky.Age 51.

*KeironG. Lynch*, CTP, has served as Executive Vice President andChief Administrative Officer since 2005. From 1999 to 2005, Mr. Lynch wasVice President of Global Visa Commerce Product Development for VisaInternational. Previously, he was Director of Delivery for The Source2 Group, LLC, a joint venture between MellonBank and MCI Systemhouse that provided outsourced accounts payable and accountsreceivables services to companies nationwide. Mr. Lynch held a number ofleadership positions with Mellon Bank over 17 years culminating as VicePresident and Director of New Product Development for Mellon Bank’s Global CashManagement division. Mr. Lynch holds a B.A. in Economics from DukeUniversity. Age 50.

*DavidC. Kowalek* has served as Executive Vice President and ChiefCredit Officer since 2005. From 2004 to 2005, Mr. Kowalek was Senior VicePresident and Chief Credit Officer for First Federal Bank, a public thriftinstitution. From 1987 to 2004, Mr. Kowalek held various credit andlending leadership positions with Wachovia Bank and predecessor financialinstitutions culminating as Senior Loan Officer responsible for a multi-stateregion in the mid-Atlantic area. He began his career at Chase Manhattan Bank.Mr. Kowalek holds an MBA from Adelphi University and a B.S. in Economicsand Mathematics from Wilkes University. Age 53.

*JamesV. Schermerhorn* has served as Executive Vice President andChief Lending Officer since 2005. From 2004 to 2005, Mr. Schermerhorn wasManaging Director of Penn Mezzanine Fund in King of Prussia, Pennsylvania. From2003 to 2004, he was Regional Vice President for Patriot Bank. Previously hewas Executive Vice President and Chief Lending Officer for Republic First Bank.Mr. Schermerhorn held a number of leadership positions with Mellon Bankover 29 years including Managing Director of National Business Banking andRegional Middle Market Lending Manager for Mellon East. He began his careerwith Girard Bank. Mr. Schermerhorn holds a B.A. in Economics andAccounting from Muhlenberg College and is a graduate of the Stonier GraduateSchool of Banking. Age 63.

*RichardJ. Fuchs* has served as Executive Vice President of RetailBanking since April 2006. Mr. Fuchs joined Fox Chase Bank after 30 yearswith The Bryn Mawr Trust Company in Bryn Mawr, Pennsylvania where he was theSenior Vice President of the Community Banking Division and from 2000 to 2005also served as the President and CEO of The Bryn Mawr Brokerage Company.Mr. Fuchs attended Villanova University where he majored in Civil Engineeringand is a graduate of the Stonier Graduate School of Banking. Age 57.

**ITEM 1A.               RISK FACTORS**

**Ourrelatively high level of nonperforming assets and classified assets expose usto increased lending risks. Further, our allowance for loan losses may prove tobe insufficient to absorb losses in our loan portfolio.**

Historically, weoriginated very few multi-family and commercial real estate loans, constructionloans or commercial loans. However, in 2003, then-current management determinedto emphasize multi-family and 

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commercial real estatelending and construction lending, primarily in the southern New Jersey shorearea where it had opened branch offices. However, due to a lack of expertise inthese types of lending and a relative unfamiliarity with the market area, theseloans were not properly underwritten, including receiving inadequatedocumentation, and, as a result, many of these loans were criticized orclassified in accordance with regulatory guidelines.  This type of lending and the absence of adequateunderwriting, credit and collection policies and internal controls contributedto the issuance by the Office of Thrift Supervision of a Cease and Desist Orderin June 2005.

Following theissuance of the Cease and Desist Order in June 2005, as required by the Order,our senior management was replaced as were all but one of our existingdirectors. The new management team and board launched initiatives to collectloans at the New Jersey shore area, gather sufficient borrower information toproperly document existing loans when possible, assign proper risk grades toloans following newly implemented credit risk assessment policies, establishand maintain well documented estimates for the allowance for loan losses, andestablish appropriate underwriting, credit administration, and prudent creditrisk management policies and procedures. As a result of these actions andcontinued favorable economic conditions at the New Jersey shore area,classified assets were significantly reduced and the OTS rescinded the Order onJune 28, 2006.

At December 31, 2006, ournonperforming assets totaled $3.2 million, representing 0.43% of total assets.In addition, loans that we have classified as either special mention,substandard, doubtful or loss totaled $9.0 million, representing 2.5% of totalloans. If these loans do not perform according to their terms and thecollateral is insufficient to pay any remaining loan balance, we may experienceloan losses, which could have a material effect on our operating results. Likeall financial institutions, we maintain an allowance for loan losses to providefor loans in our portfolio that may not be repaid in their entirety. We believethat our allowance for loan losses is maintained at a level representingmanagement’s best estimate of known and interest losses in the portfolio basedupon management’s evaluation of the portfolio’s collectibility as of thecorresponding balance sheet date.

However, our allowance for loan losses may not besufficient to cover actual loan losses, and future provisions for loan lossescould materially adversely affect our operating results.

At December 31, 2006, our allowance for loan lossestotaled $2.9 million, which represented 0.82% total loans, 91.44% ofnonperforming loans and 32.81% of classified assets. Our regulators, as anintegral part of their examination process, periodically review our allowancefor loan losses and may require us to increase our allowance for loan losses byrecognizing additional provisions for loan losses charged to expense, or todecrease our allowance for loan losses by recognizing loan charge-offs, net ofrecoveries. Any such additional provisions for loan losses or charge-offs, asrequired by these regulatory agencies, could have a material adverse effect onour financial condition and results of operations.

**Ourrecent emphasis on multi-family and commercial real estate and commerciallending may expose us to increased lending risks.**

At December 31,2006, $52.9 million, or 14.7%, of our loan portfolio consisted of multi-family andcommercial real estate and commercial loans. We have recently begun toemphasize these types of lending and have hired a highly experienced team ofnineteen commercial lending and credit and risk management professionals toaccelerate this initiative. These types of loans generally expose a lender togreater risk of non-payment and loss than one- to four-family residentialmortgage loans because repayment of the loans often depends on the successfuloperation of the property and the income stream of the borrowers. Such loanstypically involve larger loan balances to single borrowers or groups of relatedborrowers compared to one- to four-family residential mortgage loans. Inaddition, since such loans generally entail greater credit risk than one- to four-familyresidential mortgage loans, we may need to increase our allowance for loanlosses in the future to account for the likely increase in probable incurredcredit losses associated with the growth of such loans. Also, many of ourmulti-family and commercial real estate and land borrowers have more than oneloan outstanding with us. Consequently, an adverse development with respect toone loan or one credit relationship can expose us to a significantly greaterrisk of loss compared to an adverse development with respect to a one- tofour-family residential mortgage loan.

Moreover, we onlyrecently began our initiative to originate commercial business loans. AtDecember 31, 2006, we had 33 commercial loans totaling $11.2 million inour portfolio.  Accordingly, ourcommercial loan portfolio is unseasoned and our limited experience inoriginating these types of loans does not provide us with a significant paymenthistory pattern with which to judge future collectibility. These loans willalso not have been subjected to unfavorable economic conditions. As a result,it may be difficult to predict the future performance of this part of our loanportfolio. These loans may have delinquency or charge-off levels above ourhistorical 

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experience, which couldadversely affect our future performance. Further, commercial loans generallyhave larger balances and involve a greater risk than one- to four-familyresidential mortgage loans. Accordingly, if we make any errors in judgment inthe collectibility of our commercial loans, any resulting charge-offs may belarger on a per loan basis than those incurred with our residential mortgageloan or consumer loan portfolios.

**Ourbusiness strategy, which includes asset growth, was only recently initiated andhas not yet had the time to be proven successful. Further, if we fail to growor fail to manage our growth effectively, our financial condition and resultsof operations could be negatively affected.**

In June 2005, asrequired by the Cease and Desist Order issued by the Office of ThriftSupervision, we adopted a new three-year business strategy. Our strategyinvolves asset and liability growth, specifically in originating commercialloans and attracting favorably priced deposits, while maintaining assetquality. Achieving our growth targets requires us to attract customers thatcurrently bank at other financial institutions in our market, therebyincreasing our share of the market. Our ability to successfully grow will alsodepend on a variety of factors, including the market penetration of the newcommercial lenders that we hired, continued favorable market conditions, thecontinued availability of desirable business opportunities and the competitiveresponses from other financial institutions in our market areas. While we believewe have the management resources and internal systems in place to successfullymanage our future growth, there can be no assurance growth opportunities willbe available or that we will be successful in implementing our businessstrategies.  Further, it will take timeto implement our business strategy, especially for our commercial lenders tooriginate enough loans and business deposits to generate the revenue needed tooffset the associated expenses, including salaries and the occupancy expenserelated to the new loan production offices. We expect that it may take asignificant period of time before we can achieve the intended results of ournew business strategy. During the period while the business plan is beingimplemented, our operating results may be negatively impacted. Further, therecan be no assurance that our new strategic plan, even if successfullyimplemented, will ultimately produce positive results.

**Ourdecrease in deposits may cause us to rely more heavily on more expensivewholesale funding sources, which would increase our expenses and adverselyaffect our operating margins and profitability.**

Historically, weattempted to be the market leader in rates on longer-term money market accountsand certificates of deposit. However, in 2005, the new management, inconnection with the planned reductions in the balance sheet, offeredless-than-market rates as it attempted to allow the longer-term money marketaccounts and certificates of deposit to run-off, thereby shortening theduration of its liabilities. While deposit rates were raised to be competitivein the market in November 2005, deposits have continued to decrease. Depositswere $596.5 million at December 31, 2006 compared to $682.3 million atDecember 31, 2005. While we believe that branch expansion and our emphasison building transaction accounts will increase deposits, there can be noguarantee if and when this will occur. Further, the considerable competitionfor deposits in our market will also make it more difficult for us to obtain reasonablypriced deposits.

If we are not ableto increase deposits, we will have to rely more heavily on wholesale sources tofund our asset growth than we have in the past, which are generally moreexpensive than retail sources of funding. If we are required to rely moreheavily on more expensive funding sources to support future growth, ourrevenues may not increase proportionately to cover our costs. In this case, ouroperating margins and profitability would be adversely affected.

**Risinginterest rates may reduce our earnings and asset value.**

Interest rateshave recently been at historically low levels. However, since June 30,2004, the Federal Reserve Board has increased its target for the federal fundsrate seventeen times, from 1.0% to 5.25%. While these short-term marketinterest rates (which we use as a guide to price our deposits) have increased,longer-term market interest rates (which we use as a guide to price ourlonger-term loans) have not. This “flattening” of the market yield curve hashad a negative impact on our interest rate spread and net interest margin, andif short-term interest rates continue to rise, and if rates on our depositscontinue to reprice upwards faster than the rates on our long-term loans andinvestments, we would continue to experience compression of our interest ratespread and net interest margin, which would have a negative effect on ourprofitability.

Changes in interest rates also affect the value of ourinterest-earning assets, and in particular our securities portfolio. Generally,the value of fixed-rate securities fluctuates inversely with changes ininterest rates. Unrealized 

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gains and losses on securities available for sale are reported as aseparate component of equity, net of tax. Decreases in the fair value ofsecurities available for sale resulting from increases in interest rates couldhave an adverse effect on stockholders’ equity.

**If we donot achieve profitability on our new branches and loan production offices, thenew offices may reduce our earnings.**

We opened ourMarmora, New Jersey branch office and two new loan production offices (withdeposit authority) in the Philadelphia metropolitan area in 2006. Additionally,we have plans to open an additional branch office on land we own in Absecon,New Jersey by 2008.  Numerous factorscontribute to the performance of a new branch or loan production facility, suchas our ability to select a suitable location, competition, our ability to hireand retain qualified personnel, and the effectiveness of our marketingstrategy. It takes time for a new branch to generate significant deposits andloan volume to offset expenses, some of which, like salaries and occupancyexpense, are relatively fixed costs. Additionally, there can be no assurance that any of these new officeswill ever become profitable.  During theperiod of time before a branch office or loan production facility can becomeprofitable, operating an office will negatively impact our net income.

**Weoperate in a highly regulated environment and we may be adversely affected bychanges in laws and regulations.**

Fox Chase MHC, FoxChase Bancorp and Fox Chase Bank are subject to extensive regulation,supervision and examination by the Office of Thrift Supervision and Fox ChaseBank is also subject to regulation and supervision by the Federal DepositInsurance Corporation, as insurer of its deposits.  Such regulation and supervision governs theactivities in which an institution and its holding company may engage, and areintended primarily for the protection of the insurance fund and the depositorsand borrowers of Fox Chase Bank rather than for holders of Fox Chase Bancorpcommon stock. Regulatory authorities have extensive discretion in theirsupervisory and enforcement activities, including the imposition of restrictionson our operations, the classification of our assets and determination of thelevel of our allowance for loan losses. Any change in such regulation andoversight, whether in the form of regulatory policy, regulations, legislationor supervisory action, may have a material impact on our operations.

**Adownturn in the local economy or a decline in real estate values could reduceour profits.**

Nearly all of ourloans are secured by real estate or made to businesses in the Philadelphiametropolitan area or in Atlantic or Cape May Counties, New Jersey. As aresult of this concentration, a downturn in the local economies could causesignificant increases in nonperforming loans, which would reduce our profits.In recent years there has been a significant increase in real estate values inour market areas. As a result of rising home prices, our loans have been wellcollateralized. A decline in real estate values could cause some of ourmortgage loans to become inadequately collateralized, which would expose us toa greater risk of loss.

**Strongcompetition within our market areas could reduce our profits.**

We face intensecompetition in making loans, attracting deposits and attracting and retainingkey employees and relationship managers. In particular, several financialinstitutions have recently opened new offices or branches and numerous de novofinancial institutions have recently been formed in thePhiladelphia-Camden-Wilmington metropolitan statistical area. This competitionhas made it more difficult for us to make new loans and at times has forced usto offer higher deposit rates. It has also made it more difficult and costly toattract and hire employees with the level of expertise we require to implementour strategic plan. Price competition for loans and deposits might result in usearning less on our loans and paying more on our deposits, which would reducenet interest income. Also, additional compensation expense increasesnoninterest expense, reducing net income. Competition also makes it more difficultto grow loans and deposits. As of June 30, 2006, the most recent date forwhich information is available, we held 0.22% of the deposits inPhiladelphia-Camden-Wilmington metropolitan statistical area. Some of theinstitutions with which we compete have substantially greater resources andlending limits than we have and may offer services that we do not provide. Weexpect competition to increase in the future as a result of legislative,regulatory and technological changes and the continuing trend of consolidationin the financial services industry. Our profitability depends upon ourcontinued ability to compete successfully in our market areas.

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**Our lowreturn on equity may negatively affect our stock price.**

Net income dividedby average equity, known as “return on equity,” is a ratio many investors useto compare the performance of a financial institution to its peers. Our returnon equity was reduced due to the large amount of capital that we raised in our2006 stock offering and to expenses we will incur in pursuing our growthstrategies, the costs of being a public company and added expenses associatedwith our employee stock ownership plan and planned equity incentive plan. Untilwe can increase our net interest income and noninterest income, we expect ourreturn on equity to be below the median return on equity of 5.60% for thetrailing twelve months for all publicly traded thrifts, which may negativelyaffect the value of our common stock. For the twelve months ended December 31, 2006, our return on equitywas 4.59%.

**Expensesfrom operating as a public company and from new stock-based benefit plans willcontinue to adversely affect our profitability.**

Our noninterestexpenses are impacted as a result of the financial, accounting, legal andvarious other additional expenses usually associated with operating as a publiccompany.  We also recognize additionalannual employee compensation and benefit expenses stemming from the shares thatare purchased or granted to employees and executives under the employee stockownership plan and other new benefit plans. These additional expenses adversely affect our profitability.  We recognize expenses for our employee stockownership plan when shares are committed to be released to participants’accounts and will recognize expenses for restricted stock awards and stockoptions over the vesting period of awards made to recipients.

**Issuanceof shares for benefit programs may dilute your ownership interest.**

We intend to adopt an equity incentive plan.  If stockholders approve the new equityincentive plan, we intend to issue shares to our officers and directors throughthis plan.  If the restricted stockawards under the equity incentive plan are funded from authorized but unissuedstock, your ownership interest in the shares issued to persons other than FoxChase MHC could be diluted by up to approximately 4.2%.  If the shares issued upon the exercise ofstock options under the equity incentive plan are issued from authorized butunissued stock, your ownership interest in the shares issued to persons otherthan Fox Chase MHC could be diluted by up to approximately 9.9%.

**FoxChase MHC’s majority control of our common stock will enable it to exercisevoting control over most matters put to a vote of stockholders and will preventstockholders from forcing a sale or a second-step conversion transaction youmay find advantageous.**

FoxChase MHC owns a majority of Fox Chase Bancorp’s common stock and, through itsboard of directors, is able to exercise voting control over most matters put toa vote of stockholders. The same directors and officers who will manage FoxChase Bancorp and Fox Chase Bank will also manage Fox Chase MHC. As a federallychartered mutual holding company, the board of directors of Fox Chase MHC mustensure that the interests of depositors of Fox Chase Bank are represented andconsidered in matters put to a vote of stockholders of Fox Chase Bancorp. However,you should be aware that the votes cast by Fox Chase MHC may not be in yourpersonal best interests as a stockholder. For example, Fox Chase MHC mayexercise its voting control to defeat a stockholder nominee for election to theboard of directors of Fox Chase Bancorp. Moreover, Fox Chase MHC’s ability toelect the board of directors of Fox Chase Bancorp restricts the ability of theminority stockholders of Fox Chase Bancorp to effect a change of control ofmanagement.  In addition, stockholderswill not be able to force a merger or second-step conversion transactionwithout the consent of Fox Chase MHC as such transactions also require theapproval of at least two-thirds of all outstanding voting stock, which can onlybe achieved if Fox Chase MHC voted to approve such transactions. Somestockholders may desire a sale or merger transaction, since stockholderstypically receive a premium for their shares, or a second-step conversiontransaction, since fully converted institutions tend to trade at highermultiples than mutual holding companies. Stockholders could, however, prevent asecond step conversion or the implementation of equity incentive plans ascurrent Office of Thrift Supervision regulations and policies require theapproval of such matters by the stockholders other than Fox Chase MHC.

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**Officeof Thrift Supervision policy on remutualization transactions could prohibitacquisition of Fox Chase Bancorp, which may adversely affect our stock price.**

Current Office ofThrift Supervision regulations permit a mutual holding company to be acquiredby a mutual institution in a remutualization transaction. The possibility of aremutualization transaction has recently resulted in a degree of takeoverspeculation for mutual holding companies that is reflected in the per shareprice of mutual holding companies’ common stock. However, the Office of ThriftSupervision has issued a policy statement indicating that it viewsremutualization transactions as raising significant issues concerning disparatetreatment of minority stockholders and mutual members of the target entity andraising issues concerning the effect on the mutual members of the acquiringentity. Under certain circumstances, the Office of Thrift Supervision intendsto give these issues special scrutiny and reject applications providing for theremutualization of a mutual holding company unless the applicant can clearlydemonstrate that the Office of Thrift Supervision’s concerns are not warrantedin the particular case. Should the Office of Thrift Supervision prohibit orotherwise restrict these transactions in the future, our per share stock pricemay be adversely affected.

**ITEM 1B.               UNRESOLVED STAFF COMMENTS**

None.

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**ITEM 2.  PROPERTIES**

We conduct ourbusiness through our main office and branch offices.  The following table sets forth certaininformation relating to these facilities as of December 31, 2006.
| **Location**                                                | ** ** | **Year  Opened** | ** ** | **Owned/  Leased** | ** ** | **Date of Lease  Expiration** | ** ** | **Net Book Value  as of  December 31, 2006** | ** ** |
|-------------------------------------------------------------|------------|------------------|------------|--------------------|------------|-----------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | ** **       | ** ** | ** **         | ** ** | ** **                              | ** ** | **(In thousands)**                                               | ** ** |
| **Main  Office:**                                           |       |             |       |               |       |                                    |       |                                                                  |       |
| 4390 Davisville  Road 

Hatboro,  Pennsylvania              |       | 1996             |       | Owned              |       | —                                  |       | $                                                                     | 2,259      |   |
|                                                        |       |             |       |               |       |                                    |       |                                                                  |       |
| **Branch  Offices:**                                        |       |             |       |               |       |                                    |       |                                                                  |       |
| 401 Rhawn Street  

Philadelphia,  Pennsylvania             |       | 1956             |       | Owned              |       | —                                  |       | 587                                                                   |       |
|                                                        |       |             |       |               |       |                                    |       |                                                                  |       |
| 815 Bustleton  Pike 

Richboro,  Pennsylvania               |       | 1985             |       | Owned              |       | —                                  |       | 537                                                                   |       |
|                                                        |       |             |       |               |       |                                    |       |                                                                  |       |
| 1 Fitzwatertown  Road 

Willow Grove,  Pennsylvania         |       | 1995             |       | Owned              |       | —                                  |       | 405                                                                   |       |
|                                                        |       |             |       |               |       |                                    |       |                                                                  |       |
| 1041 York Road 

Warminster,  Pennsylvania                  |       | 2000             |       | Owned              |       | —                                  |       | 863                                                                   |       |
|                                                        |       |             |       |               |       |                                    |       |                                                                  |       |
| 921 West Avenue 

Ocean City, New  Jersey                   |       | 2000             |       | Owned              |       | —                                  |       | 506                                                                   |       |
|                                                        |       |             |       |               |       |                                    |       |                                                                  |       |
| 6059 Black Horse  Pike 

Egg Harbor  Township, New Jersey   |       | 2000             |       | Owned              |       | —                                  |       | 899                                                                   |       |
|                                                        |       |             |       |               |       |                                    |       |                                                                  |       |
| 5871 Lower York  Road 

Lahaska,  Pennsylvania              |       | 2004             |       | Owned              |       | —                                  |       | 1,488                                                                 |       |
|                                                        |       |             |       |               |       |                                    |       |                                                                  |       |
| 8 U.S. Route 9  South 

Marmora, New  Jersey                |       | 2006             |       | Owned              |       | —                                  |       | 1,658                                                                 |       |
|                                                        |       |             |       |               |       |                                    |       |                                                                  |       |
| 67 Dowlin Forge  Road 

Exton,  Pennsylvania                |       | 2006             |       | Leased             |       | 2007                                    | (1)        | —                                                                |       |
|                                                        |       |             |       |               |       |                                    |       |                                                                  |       |
| 210 West State  Street 

Media,  Pennsylvania               |       | 2006             |       | Leased             |       | 2008                                    | (2)        | 36                                                                    |       |
| ** **                                                  |       |             |       |               |       |                                    |       |                                                                  |       |
| **Administrative  Offices:**                                |       |             |       |               |       |                                    |       |                                                                  |       |
|                                                        |       |             |       |               |       |                                    |       |                                                                  |       |
| 1225 Industrial  Boulevard (3) 

Southampton,  Pennsylvania |       | —           |       | Owned              |       | —                                  |       | 736                                                                   |       |
|                                                        |       |             |       |               |       |                                    |       |                                                                  |       |
| **Other  Properties:**                                      |       |             |       |               |       |                                    |       |                                                                  |       |
|                                                        |       |             |       |               |       |                                    |       |                                                                  |       |
| 811 Bustleton  Pike (4) 

Richboro,  Pennsylvania           |       | —           |       | Owned              |       | —                                  |       | 50                                                                    |       |
|                                                        |       |             |       |               |       |                                    |       |                                                                  |       |
| Absecon, New  Jersey (5)                                    |       | —           |       | Owned              |       | —                                  |       | 2,008                                                                 |       |
|                                                        |       |             |       |               |       |                                    |       |                                                                  |       |
| Pleasantville,  New Jersey (6)                              |       | —           |       | Owned              |       | —                                  |       | 547                                                                   |       |
|                                                        |       |             |       |               |       |                                    |       |                                                                  |       |
|                                                             |            |                  |            |                    |            |                                         |            |                                                                       |            |  |

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(1)                We have an optionto renew this lease for three additional one-year periods.

(2)                We have an optionto renew this lease for two additional one-year periods.

(3)                This propertyhouses administrative, operational and information technology personnel.  We have entered into an agreement to sellthis property and expect to close in May 2007.

(4)                This property,which includes a one- to four-family residence and adjacent parking lot, hasbeen leased to a tenant under a lease that is automatically renewed monthlyuntil 60 days notice is given by tenant or landlord.

(5)                This property isundeveloped land we hold upon which we expect to develop a future branch by2008.

(6)                This property isundeveloped land we hold upon which we expect to develop a future branch, althoughwe have no current plans or arrangements to do so.

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**ITEM3.  LEGAL PROCEEDINGS**

Periodically,there have been various claims and lawsuits against us, such as claims toenforce liens, condemnation proceedings on properties in which we hold securityinterests, claims involving the making and servicing of real property loans andother issues incident to our business. We are not a party to any pending legal proceedings that we believewould have a material adverse effect on our financial condition, results ofoperations or cash flows.

OnApril 28, 2006, Gregory S. Cipa, the former President and Chief ExecutiveOfficer of Fox Chase Bank, filed a complaint against Fox Chase Bank in theCivil Division of the Court of Common Pleas of Bucks County, Pennsylvania.  In May 2006, Fox Chase Bank moved the case tofederal court, answered the complaint and filed a counterclaim. In November2006, Mr. Cipa amended his complaint, and now alleges Fox Chase Bankbreached its contract with him and violated its state statutory obligations byfailing to pay Mr. Cipa certain employment benefits which he claims to haveearned while serving as the President and Chief Executive Officer of Fox ChaseBank.  Mr. Cipa seeks monetarydamages in excess of $900,000 and the payment of litigation costs.  The parties completed discovery and filedmotions for summary judgment that have not yet been ruled upon.  Fox Chase Bank believes this action iswithout merit and intends to vigorously pursue its defenses.

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

None.

# **PART II**

**ITEM 5.****     MARKET FOR REGISTRANT’SCOMMON EQUITY, RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

**Marketfor Common Equity and Related Stockholder Matters**

The Company’scommon stock is listed on the Nasdaq Stock Market (“Nasdaq”) under the tradingsymbol “FXCB.”  The following table setsforth the high and low sales prices of Fox Chase Bancorp’s common stock fromOctober 2, 2006, the first day of trading of the common stock, through December31, 2006, as reported by Nasdaq.  TheCompany has not paid any dividends to its stockholders to date.  See Item 1, *“Business—Regulationand Supervision—Regulation of Federal Savings Associations— Limitation onCapital Distributions” and note 11 in* the notes to the consolidatedfinancial statements for more information relating to restrictions ondividends.  As of March 20, 2007, theCompany had approximately 1,116 holders of record of common stock.

| 2006:          | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
|           |       |     |       |    |       |
| First Quarter  |       | N/A      |       | N/A     |       |
| Second Quarter |       | N/A      |       | N/A     |       |
| Third Quarter  |       | N/A      |       | N/A     |       |
| Fourth Quarter |       | $13.85   |       | $12.75  |       |

 

23

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**StockPerformance Graph**

The following graph compares the cumulative total return of the Companycommon stock with the cumulative total return of the SNL Mid-Atlantic ThriftIndex and the Index for the Nasdaq Stock Market (U.S. Companies, all SIC).  The graph assumes that $100 was invested onOctober 2, 2006, the first day of trading of the common stock.  Cumulative total return assumes reinvestmentof all dividends.

** **
| ** **                     | ** ** | **Period Ending** | ** ** |
|--------------------------------|------------|------------------------|------------|
| **Index**                      | ** ** | **10/02/06**           | ** ** | **10/31/06** | ** ** | **11/30/06** | ** ** | **12/31/06** | ** ** |
| Fox Chase  Bancorp, Inc.       |       | 100.00                 |       | 100.00 |   | 106.10 |   | 104.25 |   |
| NASDAQ composite               |       | 100.00                 |       | 105.79 |   | 108.82 |   | 108.15 |   |
| SNL Mid-Atlantic thrift  index |       | 100.00                 |       | 104.55 |   | 106.27 |   | 107.97 |   |

 

**Purchasesof Equity Securities**

Fox Chase Bancorpdid not repurchase any shares of its common stock during the quarter endedDecember 31, 2006.

24

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**ITEM 6.             SELECTED FINANCIAL DATA**

 
| ** **                       | ** ** | **At December 31,** | ** ** |
|----------------------------------|------------|-------------------------------|------------|
| ** **                       | ** ** | **2006**                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                       | ** ** | **(In thousands)**       | ** ** |
| **Financial  Condition Data:**   |       |                          |       |   |   |   |   |   |   |   |   |
| Total assets                     |       | $                             | 756,985    |   | $ | 781,291 |   | $ | 899,805 |   | $ | 821,118 |   | $ | 788,917 |   |
| Cash and cash  equivalents       |       | 134,441                       |       | 46,086 |   | 43,722 |   | 32,022 |   | 46,129 |   |
| Interest-earning  time deposits  |       | —                        |       | 600 |   | 3,174 |   | 4,392 |   | 2,800 |   |
| Securities  available-for-sale   |       | 228,432                       |       | 329,504 |   | 330,199 |   | 335,388 |   | 310,118 |   |
| Loans  receivable, net           |       | 355,617                       |       | 366,393 |   | 482,606 |   | 414,438 |   | 410,139 |   |
| Loans held for  sale             |       | 1,194                         |       | 357 |   | — |   | — |   | — |   |
| Deposits                         |       | 596,534                       |       | 682,307 |   | 805,250 |   | 723,838 |   | 695,010 |   |
| Federal Home Loan  Bank advances |       | 30,000                        |       | 30,000 |   | 30,000 |   | 30,000 |   | 30,000 |   |
| Total  stockholders’ equity |       | 125,645                       |       | 63,521 |   | 59,190 |   | 62,331 |   | 58,760 |   |
| ** **                       |       |                          |       |   |   |   |   |   |   |   |   |
|                                  |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                   | ** ** | **For the Year Ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                   | ** ** | **(In thousands)**                  | ** ** |
| **Operating Data:**                                          |       |                                |       |   |   |   |   |   |   |   |   |
| Interest income                                              |       | $37,177                             |       | $37,601 |   | $37,566 |   | $35,533 |   | $39,607 |   |
| Interest expense                                             |       | 20,459                              |       | 20,697 |   | 19,693 |   | 20,662 |   | 23,031 |   |
| Net interest income                                          |       | 16,718                              |       | 16,904 |   | 17,873 |   | 14,871 |   | 16,576 |   |
| Provision (credit) for loan losses                           |       | (5,394                              | )          | (6,025 | ) | 12,282 |   | 30 |   | 1,107 |   |
| Net interest income after provision (credit) for loan losses |       | 22,112                              |       | 22,929 |   | 5,591 |   | 14,841 |   | 15,469 |   |
| Noninterest income                                           |       | 2,073                               |       | 1,214 |   | 2,279 |   | 3,405 |   | 1,149 |   |
| Noninterest expenses                                         |       | 19,867                              |       | 15,208 |   | 11,353 |   | 10,958 |   | 10,013 |   |
| Income (loss) before income taxes                            |       | 4,318                               |       | 8,935 |   | (3,483 | ) | 7,288 |   | 6,605 |   |
| Income tax provision (benefit)                               |       | 684                                 |       | 2,975 |   | (1,595 | ) | 2,497 |   | 2,405 |   |
| Net income (loss) (1)(2)                                     |       | $3,634                              |       | $5,960 |   | $(1,888 | ) | $4,791 |   | $4,200 |   |
| Earnings per share (1)(2)                                    |       | $0.14                               |       | — |   | — |   | — |   | — |   |

 

25

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| ** **                                                                                                    | ** ** | **At or for the Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2006**                                                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Performance  Ratios:**                                                                                      |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Return on  average assets                                                                                     |       | 0.49                                                                          | %          | 0.71 | % | (0.21 | )% | 0.59 | % | 0.59 | % |
| Return on  average equity                                                                                     |       | 4.59                                                                          |       | 9.50 |   | (2.82 | ) | 7.64 |   | 7.45 |   |
| Interest rate  spread (3)                                                                                     |       | 2.02                                                                          |       | 1.78 |   | 1.92 |   | 1.61 |   | 2.19 |   |
| Net interest  margin (4)                                                                                      |       | 2.33                                                                          |       | 2.05 |   | 2.11 |   | 1.87 |   | 2.40 |   |
| Noninterest  expense to average assets                                                                        |       | 2.66                                                                          |       | 1.80 |   | 1.29 |   | 1.34 |   | 1.40 |   |
| Efficiency ratio  (2)(5)                                                                                      |       | 105.63                                                                        |       | 83.94 |   | 56.34 |   | 59.96 |   | 56.49 |   |
| Average  interest-earning assets to   average interest-bearing liabilities                                    |       | 113.46                                                                        |       | 109.08 |   | 107.69 |   | 109.68 |   | 106.30 |   |
| Average equity  to average assets                                                                             |       | 10.58                                                                         |       | 7.44 |   | 7.59 |   | 7.67 |   | 7.91 |   |
| ** **                                                                                                    |       |                                                                          |       |   |   |   |   |   |   |   |   |
| **Capital  Ratios (6):**                                                                                      |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Tier 1 capital  (to adjusted assets)                                                                          |       | 12.49                                                                         |       | 8.40 |   | 6.66 |   | 7.54 |   | 7.24 |   |
| Tier 1 capital  (to risk-weighted assets)                                                                     |       | 26.79                                                                         |       | 17.76 |   | 12.92 |   | 15.76 |   | 14.59 |   |
| Total risk-based  capital (to risk-weighted   assets)                                                         |       | 27.62                                                                         |       | 19.02 |   | 14.17 |   | 16.29 |   | 15.13 |   |
| ** **                                                                                                    |       |                                                                          |       |   |   |   |   |   |   |   |   |
| **Asset  Quality Ratios:**                                                                                    |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Nonperforming  loans as a percent   of total loans                                                            |       | 0.90                                                                          |       | 1.36 |   | 0.29 |   | 0.32 |   | 0.32 |   |
| Allowance for  loan losses as a percent of total loans                                                        |       | 0.82                                                                          |       | 2.22 |   | 2.89 |   | 0.50 |   | 0.50 |   |
| Allowance for  loan losses as a percent   of nonperforming loans and accruing  loans 90 days or more past due |       | 91.44                                                                         |       | 163.90 |   | 997.99 |   | 159.29 |   | 158.45 |   |
| Net charge-offs  (recoveries) to average   outstanding loans during the period                                |       | —                                                                        |       | — |   | — |   | — |   | — |   |
|                                                                                                          |       |                                                                          |       |   |   |   |   |   |   |   |   |
| **Other  Data:**                                                                                              |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Number of:                                                                                                    |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Deposit accounts                                                                                              |       | 55,957                                                                        |       | 61,349 |   | 66,800 |   | 65,796 |   | 66,554 |   |
| Offices                                                                                                       |       | 11                                                                            |       | 8 |   | 8 |   | 7 |   | 7 |   |

----

(1)                                  OnSeptember 29, 2006, Fox Chase Bancorp, Inc. completed its initial publicoffering of common stock. Earnings per share information for 2006 is only forthe period September 29, 2006 through December 31, 2006 due to the Bank’sreorganization into a mutual holding company form and the issuance of stock inan initial public offering.

(2)                                Netincome and the efficiency ratio for 2006 reflect a one time charge of $1.5million for the contribution to the Fox Chase Bank Charitable Foundation.

(3)                                  Representsthe difference between the weighted average yield on average interest-earningassets and the weighted average cost of interest-bearing liabilities.

(4)                                  Representsnet interest income as a percent of average interest-earning assets.

(5)                                  Representsnoninterest expense divided by the sum of net interest income and noninterestincome, excluding gains or losses on the sale of securities.

(6)                                  Ratiosare for Fox Chase Bank.

 

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**ITEM 7.****     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATION**

**Overview**

Thefollowing describes various components that affect our results of operations.

***Income.***Our primary source of pre-taxincome is net interest income. Net interest income is the difference betweeninterest income, which is the income that we earn on our loans and securities,and interest expense, which is the interest that we pay on our deposits andFederal Home Loan Bank borrowings. To a much lesser extent, we also recognizepre-tax income from service charge income, mostly from service charges ondeposit accounts and loans, from the increase in cash surrender value of ourbank-owned life insurance and from the sale of loans and securities.

***Provision for Loan Losses.*** Theallowance for loan losses is maintained at a level representing management’sbest estimate of known and inherent losses in the loan portfolio, based uponmanagement’s evaluation of the portfolio’s collectibility. The allowance isestablished through the provision for loan losses, which is charged againstincome. Charge-offs, if any, are charged to the allowance. Subsequentrecoveries, if any, are credited to the allowance. Management estimates theallowance balance required using past loan loss experience, information aboutspecific borrower situations, and estimated collateral values, current economicconditions and other relevant factors. Allocation of the allowance may be madefor specific loans, but the entire allowance is available for any loan that, inmanagement’s judgment, should be charged off.

***Expenses.*** The noninterest expenses weincur in operating our business consist of salaries, benefits and othercompensation expenses, occupancy and equipment expenses, data processing costs,professional fees, marketing expenses, Federal Deposit Insurance Corporationpremiums and various other miscellaneous expenses.

Salaries, benefitsand other compensation consist primarily of salaries and wages paid to ouremployees, payroll taxes and expenses for health insurance, retirement plans,director and committee fees and other employee benefits, including the employeestock ownership plan. We will also recognize additional annual employeecompensation expenses stemming from the adoption of a new stock-based benefitplan; however, we cannot determine the actual amount of these new stock-relatedcompensation and benefit expenses until the plan is adopted and implemented.

Occupancyexpenses, which are the fixed and variable costs of buildings and equipment,consist primarily of depreciation charges, maintenance, real estate taxes andcosts of utilities. Depreciation of premises is computed using thestraight-line method based on the useful lives of the related assets, whichrange from ten to 39 years for buildings and premises. Leasehold improvementsare amortized over the useful life of the asset or the term of the lease.

Furniture andequipment expenses, which are fixed and variable costs of equipment, consistprimarily of depreciation charges, furniture and equipment expenses andmaintenance. Depreciation of equipment is computed using the straight-linemethod based on the useful lives of the related assets, which range from threeto seven years for furniture, fixtures and equipment. 

Data processingcosts include fees paid to our third-party data processing service and ATMexpense.

Professional feesinclude fees paid to our independent auditors, our attorneys and to otherprofessionals that we used to assist us with our interest rate risk managementand reviews of our loan portfolio and costs associated with being a publiccompany.

Marketing expensesinclude expenses for advertisements, promotions and premium items and publicrelations expenses.

Federal DepositInsurance Corporation premiums are payments we make to the Federal DepositInsurance Corporation for insurance of our deposit accounts.

Other expensesinclude expenses for supplies, telephone and postage, contributions anddonations, regulatory assessments, insurance premiums and other fees and expenses.

 

27

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**OperatingStrategy**

***Operating Strategy from 2003 to 2005.***  Historically, we originated primarily one- tofour-family residential real estate loans, which were generally funded byhigher-priced term maturity deposits. In 2003, then-current managementdetermined to emphasize multi-family and commercial real estate lending andconstruction lending, primarily in the southern New Jersey shore area where ithad opened branch offices. This initiative led to a significant increase inloans from $414.4 million at December 31, 2003 to $482.6 million atDecember 31, 2004. Also, we continued to offer higher rates on ourdeposits to fund the loan growth. As a result, deposits increased from $723.8million at December 31, 2003 to $805.3 million at December 31, 2004.However, when these loans were originated, they were not properly underwritten,as adequate documentation and an appraisal that met regulatory guidelinesestablishing the value of the real estate collateral was not always obtained.Also, loan settlements were not typically attended by anyone representing us.As a result, there were instances where the requirements of the loancommitment, including additional required collateral, were not obtained.Further, construction loan disbursements were made without adequate controls.Additionally, the former management of Fox Chase Bank failed to adopt a riskrating system and update its allowance for loan losses policy to account forthe new types of loans that were being originated. Further, management failedto properly review and classify the new types of loans. This type of lendingand the absence of adequate underwriting, credit and collection policies andinternal controls contributed to the issuance by the Office of ThriftSupervision of a Cease and Desist Order, which we consented to on June 6,2005. Additionally, it caused criticized and classified assets to increase from$775,000 at December 31, 2003 to $90.7 million at December 31, 2004.While Fox Chase Bank did not incur any losses on these loans during the sameperiod, it did record a $12.3 million provision for loan losses in 2004, whichcontributed to a net loss of $1.9 million in 2004. 

***OperatingStrategy During Pendency of Cease and Desist Order.*** OnJune 6, 2005, we consented to the issuance of an Order to Cease and Desistby the Office of Thrift Supervision. The Cease and Desist Order cited thefollowing violations of Office of Thrift Supervision laws and regulations: 
|        | · | failure to maintain adequate real estate lending  policies, as these policies did not provide prudent underwriting standards or  administration procedures; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · | originating loans in excess of the institution’s  regulatory required lending limits;                                                                  |
|   | · | failure to adequately evaluate and classify its  assets on a regular basis and failure to establish an adequate valuation  allowance on classified assets;  |
|   | · | failure to file accurate regulatory reports,  including Office of Thrift Supervision Thrift Financial Reports and  Suspicious Activity Reports;             |
|   | · | failure to adhere to the requirements of Regulation  O, the regulation that governs extensions of credit to insiders of the  institution;                   |
|   | · | failure to adhere to Office of Thrift Supervision  guidelines on establishing the value of the collateral on which loans were  originated; and              |
|   | · | failure to provide the required certification on the  Office of Thrift Supervision Thrift Financial Reports by officers and  directors.                     |

As part of this order, the Office of ThriftSupervision ordered us to discontinue a number of practices, and specificallyordered us to take certain actions. We were ordered to: 
|        | · | discontinue originating the following types of  loans:                                                                                                                                                                                                                                                                                                                      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · | real estate acquisition, development and/or  construction loans, except for residential construction mortgage loans  (1) on owner-occupied one-to four-family residences; (2) with  loan-to-value ratios that do not exceed 80% of the value of the collateral;  and (3) in which we have received a firm commitment to finance the  project once completed; |
|   | · | mortgage or consumer loans, except for  (1) owner-occupied mortgage loans on which we have a first lien; and  (2) prudently underwritten, well-secured consumer loans, in each case  only to borrowers that can demonstrate a high level of creditworthiness                                                                                                      |
|   | · | restrict our asset growth to an amount not to exceed  net interest credited on deposit liabilities;                                                                                                                                                                                                                                                                         |
|   | · | hire a new chief executive officer;                                                                                                                                                                                                                                                                                                                                         |
|   | · | improve our board’s oversight over lending and risk  exposure, including assessing our capital position and exposure to  higher-risk loans;                                                                                                                                                                                                                            |
|        |        |                                                                                                                                                                                                                                                                                                                                                                             |  |  |

 

28

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|   | · | develop a new business plan with the goal to  transition our operations into activities that (1) entail less  risk;  (2) provide more stable and  sustainable sources of core income; and (3) are supported by capital  level commensurate with the risks of our operations and composition of our  balance sheet; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · | improve our loan underwriting and appraisal  policies, loans-to-one borrower compliance and internal asset review  procedures;                                                                                                                                                                                                         |
|   | · | enhance our credit administration, board management  and governance;                                                                                                                                                                                                                                                                   |
|   | · | provide the Office of Thrift Supervision with  quarterly progress reports; and                                                                                                                                                                                                                                                         |
|   | · | review and analyze our loan portfolio and, as  appropriate, review our allowance for loan losses.                                                                                                                                                                                                                                      |

Following the issuance of the Cease and Desist Order,our senior management was replaced as were all but one of our existingdirectors. The new management team and board launched initiatives to collectloans at the New Jersey shore area, gather sufficient borrower information toproperly document existing loans when possible, assign proper risk grades toloans following newly implemented credit risk assessment policies, establishand maintain well documented estimates for the allowance for loan losses, andestablish appropriate underwriting, credit administration, and prudent creditrisk management policies and procedures. As a result of these actions andcontinued favorable economic conditions at the New Jersey shore area,criticized and classified assets were reduced from $90.7 million atDecember 31, 2004 to $3.2 million at December 31, 2006. As a result ofthese actions and the reduction in criticized and classified assets, the needfor allowance for loan losses was reduced, which resulted in the $6.0 millionand $5.4 million credit to the provision for loan losses during 2005 and 2006,respectively. 

Additionally,initiatives were undertaken to strengthen the system of internal controls,improve policies and procedures and upgrade the quality and experience ofmanagement in all areas of the Company. Also, to comply with the Order, weimproved our Board’s oversight over lending and risk exposure, developed a newbusiness plan, improved our loan underwriting and appraisal policies,loans-to-one borrower compliance and internal asset review procedures, enhancedour credit administration and Board management and governance. In addition, wereviewed and analyzed our loan portfolio and, as appropriate, reviewed ourallowance for loan losses. As a result of these efforts, effectiveJune 28, 2006, the Order to Cease and Desist was terminated. 

As a result of theCease and Desist Order and the prohibition on growing our asset size andspecifically from originating various types of loans and from the loan sales ofone to- four-family residential loans, which was done to manage interest raterisk, our loan portfolio and asset size decreased. As a result, our fundingneeds decreased, so we offered less-than-market rates on our longer-term moneymarket accounts and certificates of deposit to shorten the duration of ourliabilities and decrease our deposits. 

***Current Operating Strategy.***  New management and board reassessed ourstrategic direction and our opportunities for profitability. The determinationwas made to capitalize on our 140-year tradition of strong personalizedcustomer service, which we believe distinguishes us from the large regionalbanks that operate in our market area. At the same time, the decision was madeto differentiate ourselves from the small community banks in our market placeby leveraging the strong commercial and business expertise of our newmanagement team and focusing on the businesses in our market area. Further, webelieve that our capital, which was significantly increased through the stockoffering, allows us to make loans of a size not permitted by the de novofinancial institutions in our market area, who are restrained by smallercapital levels and smaller loans to one borrower limits. Thus, as discussed inmore detail below, we intend to continue to expand our product offerings,diversify our lending operations and expand our footprint and market presencein the metropolitan Philadelphia area and in the southern New Jersey shore areain an attempt to increase assets, while maintaining sound asset quality andenhancing profitability. 

Historically, weattempted to be the market leader in rates on longer-term money market accountsand certificates of deposit. However, in 2005, the new management, inconnection with the planned reductions in the levels of assets, offeredless-than-market rates as it attempted to allow the longer-term money marketaccounts and certificates of deposit to run-off, thereby shortening theduration of their liabilities. While deposit rates were raised to becompetitive in the market in late 2005 and throughout 2006, deposits havecontinued to decrease. Deposits were $596.5 million at December 31, 2006compared to $682.3 million at December 31, 2005. We believe that branchexpansion and our emphasis on building transaction accounts, both more fullydescribed below, will increase deposits. However, the considerable competitionfor deposits in our market will also make it more difficult for us to obtainreasonably priced deposits. To the extent that our retail funding sources donot provide for adequate funding, we will rely more heavily on wholesalefunding in addition to retail funds to leverage the balance sheet andaccelerate growth. 

29

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Our mission is tobecome the leading relationship-based business and consumer bank in our marketareas by delivering financial products and services tailored to our clients’needs. We plan to continue our strategy of: 
|        | · | pursuing opportunities to increase commercial  lending in our primary market area;                                                       |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                     |
|   | · | building profitable business and consumer  relationships with an emphasis on growing transaction deposit accounts and  deposit balances; |
|   |   |                                                                                                                                     |
|   | · | increasing income by expanding our product offerings  and continuing to emphasize customer service; and                                  |
|   |   |                                                                                                                                     |
|   | · | expanding our footprint and market presence through  opening additional branch and loan production offices.                              |

***Pursuing opportunities to increase commercial lending in ourprimary market area***

AtDecember 31, 2006, $52.9 million, or 14.7%, of our loan portfolioconsisted of multi-family and commercial real estate loans and commercialbusiness loans.  We intend to emphasizethese types of lending and in 2006 hired a highly experienced team of nineteencommercial lending and commercial credit and risk management professionals toaccelerate this initiative. We may hire additional commercial lenders and cashmanagement professionals in the future to increase this type of lending.  Loans secured by multi-family and commercialreal estate and business assets are generally larger and involve a greaterdegree of risk than one-to four-family residential mortgage loans.Consequently, multi-family and commercial real estate and commercial businessloans typically have higher yields, which increase our net interest margin andnet interest spread. In addition, these loans are beneficial for interest raterisk management because they typically have shorter terms and adjustableinterest rates. There are many multi-family and commercial real estateproperties and commercial businesses located in our market area, and with theadditional capital raised in the offering we may pursue the larger lendingrelationships associated with these opportunities, while continuing tooriginate any such loans in accordance with what we believe are our conservativeunderwriting guidelines.

Commercial lendinggenerally exposes a lender to greater risk of non-payment and loss than one- tofour-family residential mortgage loans. To mitigate against the potential forthis loss, in the past year, we have added significant commercial creditexpertise through the hiring of our chief credit officer, chief administrativeofficer, chief lending officer and a credit risk manager. Additionally, we havecreated and revamped where necessary, our commercial lending credit-related policiesand procedures. For a discussion of the risks related to our commercial loanportfolio, see Item 1, “*Business—LoanUnderwriting Risks.*”

***Building profitable business and consumer relationships withan emphasis on growing transaction deposit accounts and deposit balances***

We believe a solidbanking relationship is best expressed in the form of the primary transactionaccount. For consumers this is the household checking account from which theypay their bills. For businesses it is one or more operating accounts andrelated cash management services. The primary transaction account isdistinguished from other financial services in that it has no maturity orpayoff. It is the link between client and bank that anchors the banker-clientrelationship. We intend to focus our resources on growing profitable businessand consumer relationships built upon the primary transaction account. This isbecoming increasing difficult. More competitors recognize the inherentrelationship-value of the primary consumer and business transaction account andmore automated payment links in the form of direct debits and direct depositsmake it increasingly inconvenient to switch from one bank to another. Yet thereremain opportunities to deliver what clients care about most in the form ofexceptional service and convenience.

There are manyfactors that affect the profitability of client relationships, some of whichare beyond our control. We use a number of business disciplines to promoteprofitable relationships that include who we target to become clients, how weprice our products and services, how we underwrite and administer loans, how weidentify, measure, monitor and manage risk, how we deploy our capital and howwe manage and control costs. These measures combine to promote profitablerelationships.

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***Increasing income by expanding our product offerings andcontinuing to emphasize customer service***

We are striving tobecome a full-service financial services company offering our customers a broadrange of loan and deposit products. On the lending side, we have recentlydeveloped commercial loan products, including unsecured lines of credit,letters of credit, commercial mortgage loans, revolving credit facilities andcommercial construction loans. On the deposit side, we expanded our depositproducts and services, including offering on-line bill payment, a suite of cashmanagement products and custodial services.

While a full arrayof products and services is essential, we recognize that our clients do notnecessarily buy banking products or services, but rather they buy a wide numberof satisfactions that are attained through the effective use of our productsand services. Our products and services are merely a vehicle to the attainmentof client satisfaction. For example, a business client does not so much buy acommercial loan as buys the satisfaction of growing their company that isenabled by the working capital that comes from the loan. Our commitment todelivering what our clients care about most is our link between our productsand services and client satisfaction.

***Expanding our footprint and market presence through openingadditional branch and loan production offices***

In March 2006, weopened a new office in Marmora, New Jersey, in May 2006, we opened a loanproduction office (with deposit authority) in Exton, Pennsylvania and in July2006, we opened a loan production office (with deposit authority) in Media,Pennsylvania. Additionally, we expect to build a branch office by 2008 on landwe own in Absecon, New Jersey.  We alsowill consider expansion in and around our current market area in future years,whether through de novo branching or acquisition. However, we have not enteredinto any binding commitments regarding our expansion plans. The new brancheshave been and are expected to continue to be, funded by cash generated by ourbusiness. Consequently, we do not expect to borrow funds for these expansionprojects.

**CriticalAccounting Policies**

We consideraccounting policies involving significant judgments and assumptions bymanagement that have, or could have, a material impact on the carrying value ofcertain assets or on income to be critical accounting policies. We consider thefollowing to be our critical accounting policies: allowance for loan losses,deferred income taxes, mortgage servicing rights, and other-than-temporaryimpairment of securities.

***Allowance for Loan Losses.*** Theallowance for loan losses is maintained at a level representing management’sbest estimate of known and inherent losses in the loan portfolio, based onmanagement’s evaluation of the portfolio’s collectibility. The allowance isestablished through the provision for loan losses, which is charged againstincome. Determining the amount of the allowance for loan losses necessarilyinvolves a high degree of judgment. Among the material estimates required toestablish the allowance are: loss exposure at default; the amount and timing offuture cash flows on impacted loans; value of collateral; and determination ofloss factors to be applied to the various elements of the portfolio. All ofthese estimates are susceptible to significant change. Management reviews thelevel of the allowance on a quarterly basis and establishes the provision forloan losses based upon an evaluation of the portfolio, past loss experience,current economic conditions and other relevant factors related to thecollectibility of the loan portfolio. Although we believe that we use the bestinformation available to establish the allowance for loan losses, futureadjustments to the allowance may be necessary if economic conditions differsubstantially from the assumptions used in making the evaluation. In addition,the Office of Thrift Supervision, as an integral part of its examinationprocess, periodically reviews our allowance for loan losses. Such agency mayrequire us to recognize adjustments to the allowance based on its judgmentsabout information available to it at the time of its examination. A large losscould deplete the allowance and require increased provisions to replenish theallowance, which would negatively affect earnings. For additional discussion,see *“—Risk Management—Analysis andDetermination of the Allowance for Loan Losses”* below and note 1 ofthe notes to the consolidated financial statements included in this annualreport.

***Deferred Income Taxes.*** We use theasset and liability method of accounting for income taxes as prescribed inStatement of Financial Accounting Standards No. 109, “Accounting forIncome Taxes.” Under this method, deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases. If current available information raises doubt as tothe realization of the deferred tax assets, a valuation allowance is

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established. Deferred taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences areexpected to be recovered or settled. We exercise significant judgment inevaluating the amount and timing of recognition of the resulting taxliabilities and assets. These judgments require us to make projections offuture taxable income. The judgments and estimates we make in determining ourdeferred tax assets, which are inherently subjective, are reviewed on acontinual basis as regulatory and business factors change. Any reduction inestimated future taxable income may require us to record a valuation allowanceagainst our deferred tax assets. A valuation allowance would result inadditional income tax expense in the period, which would negatively affectearnings.

***Mortgage Servicing Rights.*****Mortgage servicing rights associated withloans originated and sold, where servicing is retained, are capitalized andincluded in other intangible assets in the consolidated balance sheet. Thevalue of the capitalized servicing rights represents the present value of thefuture servicing fees arising from the right to service loans in the portfolio.Critical accounting policies for mortgage servicing rights relate to theinitial valuation and subsequent impairment tests. The methodology used todetermine the valuation of mortgage servicing rights requires the developmentand use of a number of estimates, including anticipated principal amortizationand prepayments of that principal balance. Events that may significantly affectthe estimates used are changes in interest rates, mortgage loan prepaymentspeeds and the payment performance of the underlying loans. The carrying valueof the mortgage servicing rights is periodically reviewed for impairment basedon a disaggregated impairment test based on fair value. Impairment, if any, isrecognized through a valuation allowance and is recorded as amortization ofintangible assets.

***Other-Than-Temporary Impairment of Securities***.Statement of Financial Accounting Standards No. 115, “Accounting forCertain Investments in Debt and Equity Securities,” and FASB Staff Position FAS115-1and 124-1 “The Meaning of Other Than Temporary Impairment and ItsApplication to Certain Investments,” require companies to perform periodicreviews of individual securities in their investment portfolios to determinewhether a decline in the value of a security is other than temporary. A reviewof other-than-temporary impairment requires companies to make certain judgmentsregarding the nature of the decline, its effect on the financial statements andthe probability, extent and timing of a valuation recovery and the company’sintent and ability to hold the security. Pursuant to these requirements, weassess valuation declines to determine the extent to which such changes areattributable to (1) fundamental factors specific to the issuer, such asfinancial condition, business prospects or other factors, or(2) market-related factors, such as interest rates or equity marketdeclines. If the decline in the market value of a security is determined to beother than temporary, we reduce the book value of such security to its currentmarket value, recognizing the decline as a realized loss on the incomestatement.

**BalanceSheet Analysis**

***Loans.*** Our primary lending activity isthe origination of one- to four-family residential loans. We also originatemulti-family and commercial real estate loans, construction loans and consumerloans. While we have not historically originated commercial loans, we havebegun to emphasize this type of lending.

The largestsegment of our loan portfolio is one- to four-family residential loans. At December 31,2006, these loans totaled $209.5 million, or 58.3% of total loans, compared to$228.5 million, or 60.9% of total loans, at December 31, 2005.  At December 31, 2004, these loans totaled$250.0 million, or 50.1% of total loans. The size of our one- to four-family residential loan portfolio hasdecreased over the past year as we sold $20.9 million in longer-term fixed-rateone- to four-family residential real estate loans in the secondary market, inan effort to manage interest rate risk.

Multi-family andcommercial real estate loans and commercial business loans totaled $52.9million and represented 14.7 % of total loans at December 31, 2006compared to $33.1 million, or 8.8% of total loans at December 31, 2005.These loans totaled $85.8 million, or 17.2% of total loans, atDecember 31, 2004. The increase in 2006 reflects the hiring of a new teamof commercial lenders and the opening of new offices in 2006.  In 2003, our former management commenced aloan program in the southern New Jersey shore area where it had recently openedbranch offices, which included loans on multi-family housing units,condominiums and seasonal businesses such as restaurants and bars. However, dueto a lack of expertise in this type of lending, a relative unfamiliarity with themarket area and inadequate underwriting (including inadequate documentation),many of the loans were criticized or classified, See *“—Risk Management—Analysis of Nonperforming and Classified Assets.”*In2005, new management ceased originating these loans and made significantefforts to reduce this segment of the loan portfolio through increasedcollection efforts, including adding personnel and implementing morecomprehensive procedures

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and policies, andattempting, when possible, to have the loans refinanced with other financialinstitutions, which resulted in the decrease in this portfolio.  With the addition of the new commerciallending team in 2006, the Bank expects to continue to increase the commercialloan portfolio in the future.

Construction loanstotaled $11.6 million, or 3.2% of total loans, at December 31, 2006compared to $31.0 million, or 8.3% of total loans, at December 31,2005.  These loans totaled $92.2 million,or 18.5% of total loans, at December 31, 2004.  In 2003, former management commenced anacquisition, development and construction loan program in the southern NewJersey shore area where it had recently opened new branch offices. However, dueto a lack of expertise in this type of lending and a relative unfamiliaritywith the market area, the proper documentation on these types of loans was notreceived and many of the loans were criticized or classified. In 2005, newmanagement, pursuant to the requirements of the Cease and Desist Orderinstituted by the Office of Thrift Supervision, ceased originating these loansand many of the construction projects on which these loans were originated havebeen completed.  Through collectionefforts, we have been able to reduce these loans by approximately $19.4 millionin 2006.

Consumer loans totaled$85.1 million, or 23.7% of total loans, at December 31, 2006 compared to$82.7 million, or 22.0% of total loans, at December 31, 2005. These loanstotaled $70.6 million, or 14.2% of total loans, at December 31, 2004.Growth in the consumer loan portfolio was primarily attributable to promotionof our fixed-rate home equity loan, offset by reductions in our variable-ratehome equity line of credit product, both of which are driven by the currentinterest rate environment.

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The followingtable sets forth the composition of our loan portfolio at the dates indicated.

** **
| ** **                                    | ** ** | **At December 31,**        | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|
| ** **                                    | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                    | ** ** | **Amount**                           | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                                    | ** ** | **(Dollars in thousands)** | ** ** |
| Real estate loans:                            |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One-to  four-family                           |       | $                                    | 209,463    |   | 58.3 | % | $ | 228,476 |   | 60.9 | % | $ | 250,015 |   | 50.1 | % | $ | 262,753 |   | 62.7 | % | $ | 350,651 |   | 84.3 | % |
| Multi-family  and commercial                  |       | 41,720                               |       | 11.6 |   | 32,923 |   | 8.8 |   | 85,585 |   | 17.2 |   | 57,495 |   | 13.7 |   | 16,173 |   | 3.9 |   |
| Construction                                  |       | 11,568                               |       | 3.2 |   | 31,015 |   | 8.3 |   | 92,210 |   | 18.5 |   | 46,850 |   | 11.2 |   | — |   | — |   |
| Total  real estate loans                      |       | 262,751                              |       | 73.1 |   | 292,414 |   | 78.0 |   | 427,810 |   | 85.8 |   | 367,098 |   | 87.6 |   | 366,824 |   | 88.2 |   |
| Consumer loans:                               |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Home  equity loans                            |       | 73,456                               |       | 20.5 |   | 65,003 |   | 17.3 |   | 49,154 |   | 9.9 |   | 36,065 |   | 8.6 |   | 34,585 |   | 8.4 |   |
| Automobile                                    |       | 1,030                                |       | 0.3 |   | 1,280 |   | 0.3 |   | 1,872 |   | 0.4 |   | 1,439 |   | 0.4 |   | 2,589 |   | 0.6 |   |
| Home  equity lines of credit                  |       | 10,468                               |       | 2.9 |   | 16,269 |   | 4.3 |   | 18,249 |   | 3.6 |   | 13,947 |   | 3.3 |   | 11,314 |   | 2.7 |   |
| Other                                         |       | 148                                  |       | 0.1 |   | 188 |   | 0.1 |   | 1,305 |   | 0.3 |   | 438 |   | 0.1 |   | 465 |   | 0.1 |   |
| Total  consumer loans                         |       | 85,102                               |       | 23.8 |   | 82,740 |   | 22.0 |   | 70,580 |   | 14.2 |   | 51,889 |   | 12.4 |   | 48,953 |   | 11.8 |   |
| Commercial                                    |       | 11,155                               |       | 3.1 |   | 175 |   | — |   | 175 |   | — |   | 175 |   | — |   | 115 |   | — |   |
| Total  loans                                  |       | 359,008                              |       | 100.0 | % | 375,329 |   | 100.0 | % | 498,565 |   | 100.0 | % | 419,162 |   | 100.0 | % | 415,892 |   | 100.0 | % |
| Less:                                         |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred  loan origination fees and discounts |       | (442                                 | )          |   |   | (587 | ) |   |   | (1,568 | ) |   |   | (2,615 | ) |   |   | (3,671 | ) |   |   |
| Allowance  for loan losses                    |       | (2,949                               | )          |   |   | (8,349 | ) |   |   | (14,391 | ) |   |   | (2,109 | ) |   |   | (2,082 | ) |   |   |
| Total loans, net                              |       | $                                    | 355,617    |   |   |   | $ | 366,393 |   |   |   | $ | 482,606 |   |   |   | $ | 414,438 |   |   |   | $ | 410,139 |   |   |   |

 

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**LoanMaturity**

The followingtables set forth certain information at December 31, 2006 regardingscheduled contractual maturities during the periods indicated. The tables donot include any estimate of prepayments which significantly shorten the averagelife of all loans and may cause our actual repayment experience to differ fromthat shown below. Demand loans having no stated schedule of repayments and nostated maturity are reported as due in one year or less. The amounts shownbelow exclude deferred loan fees.

 
| ** **                            | ** ** | **At December 31, 2006**    | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **One- to  Four-  Family Loans** | ** ** | **Multi-family   and  Commercial  Real Estate  Loans** | ** ** | **Construction   Loans** | ** ** | **Consumer  Loans** | ** ** | **Commercial  Loans** | ** ** | **Total  Loans** | ** ** |
| ** **                            | ** ** | **(In thousands)**                    | ** ** |
| Amounts due in:                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| One year or less                      |       | $                                          | 100        |   | $ | 1,549 |   | $ | 7,415 |   | $ | 697 |   | $ | 2,830 |   | $ | 12,591 |   |
| More than one  year to two years      |       | 708                                        |       | 1,808 |   | 4,153 |   | 2,934 |   | 2,387 |   | 11,990 |   |
| More than two  years to three years   |       | 729                                        |       | — |   | — |   | 2,790 |   | 645 |   | 4,164 |   |
| More than three  years to five years  |       | 1,107                                      |       | 11,997 |   | — |   | 12,275 |   | 1,319 |   | 26,698 |   |
| More than five  years to ten years    |       | 15,999                                     |       | 2,803 |   | — |   | 18,701 |   | 3,974 |   | 41,477 |   |
| More than ten  years to fifteen years |       | 83,608                                     |       | 5,608 |   | — |   | 37,262 |   | — |   | 126,478 |   |
| More than  fifteen years              |       | 107,212                                    |       | 17,955 |   | — |   | 10,443 |   | — |   | 135,610 |   |
| Total                                 |       | $                                          | 209,463    |   | $ | 41,720 |   | $ | 11,568 |   | $ | 85,102 |   | $ | 11,155 |   | $ | 359,008 |   |

 

The following table sets forth the dollar amount ofall scheduled maturities of loans at December 31, 2006 that are due afterDecember 31, 2007 and have either fixed interest rates or adjustableinterest rates. The amounts shown below exclude unearned interest on consumerloans and deferred loan fees.

** **

|                             | ** ** | **Fixed Rates**    | ** ** | **Floating or   Adjustable Rates** | ** ** | **Total** | ** ** |
|-----------------------------|------------|-------------------------|------------|---------------------------------------------------|------------|-----------|------------|
| ** **                  | ** ** | **(In thousands)** | ** ** |
| Real estate loans:          |       |                    |       |                                              |       |      |       |
| One- to four-family         |       | $                       | 186,381    |                                              | $          | 22,982    |       | $ | 209,363 |   |
| Multi-family and commercial |       | 34,549                  |       | 5,622                                             |       | 40,171    |       |
| Construction                |       | —                  |       | 4,153                                             |       | 4,153     |       |
| Consumer loans              |       | 73,962                  |       | 10,443                                            |       | 84,405    |       |
| Commercial loans            |       | 4,922                   |       | 3,403                                             |       | 8,325     |       |
| Total                       |       | $                       | 299,814    |                                              | $          | 46,603    |       | $ | 346,417 |   |

 

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***Securities.*** Our securities portfolioconsists primarily of callable U.S. government agency bonds and U.S. governmentagency mortgage-backed securities. Securities decreased $101.0 million or30.7%, in the year ended December 31, 2006 primarily as a result ofmaturities, calls and principal repayments of $145.5 million and the sale of a$17.2 million investment in a mutual fund, offset by purchases of $60.3million. The purchases consisted of government agency bonds, mortgage-relatedsecurities and municipal bonds with an average duration of 3.25 years.  We recorded a $394,000 loss on the mutualfund during 2005 upon our determination that the mutual fund wasother-than-temporarily impaired. We recorded an additional loss of $17,000 onthe date of sale in March 2006. In 2005 and 2004, our securities decreased$695,000 and $5.0 million, respectively, primarily due to decreases incorporate debt securities and mutual funds, offset by increases in obligationsof U.S. government agencies and mortgage-related securities. The reduction incorporate debt securities reflected the sale of lower-yielding adjustable-rateperpetual preferred stock of Freddie Mac in an effort to reposition thesecurities portfolio towards higher-yielding investments.

The followingtable sets forth the amortized cost and fair values of our securities portfolioat the dates indicated. All of our securities were available-for-sale at thedates indicated.

** **
| ** **                               | ** ** | **At December 31,** | ** ** |
|------------------------------------------|------------|-------------------------------|------------|
| ** **                               | ** ** | **2006**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                               | ** ** | **Amortized  Cost**           | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
| ** **                               | ** ** | **(In thousands)**       | ** ** |
| Obligations of  U.S. government agencies |       | $                             | 42,344     |   | $ | 41,878 |   | $ | 99,602 |   | $ | 98,308 |   | $ | 90,318 |   | $ | 89,252 |   |
| State and  political subdivisions        |       | 24,126                        |       | 24,219 |   | 18,863 |   | 18,808 |   | 18,493 |   | 18,571 |   |
| Mortgage-related  securities             |       | 159,369                       |       | 158,320 |   | 189,698 |   | 187,721 |   | 185,263 |   | 185,178 |   |
| Corporate debt  securities               |       | 4,017                         |       | 4,015 |   | 7,926 |   | 7,603 |   | 15,398 |   | 15,559 |   |
| Mutual funds                             |       | —                        |       | — |   | 17,064 |   | 17,064 |   | 21,879 |   | 21,639 |   |
| Total                                    |       | $                             | 229,856    |   | $ | 228,432 |   | $ | 333,153 |   | $ | 329,504 |   | $ | 331,351 |   | $ | 330,199 |   |

At December 31, 2006, we had no investments in asingle company or entity (other than U.S. Government-sponsored entitysecurities) that had an aggregate book value in excess of 10% of our equity atDecember 31, 2006.

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The followingtable sets forth the stated maturities and weighted average yields ofinvestment securities at December 31, 2006. Weighted average yields ontax-exempt securities are not presented on a tax equivalent basis, as theamount would be immaterial. Certain mortgage-backed securities have adjustableinterest rates and will reprice annually within the various maturity ranges.These repricing schedules are not reflected in the table below.

** **
| ** **                               | ** ** | **One Year or Less**  | ** ** | **More than One Year  to Five Years** | ** ** | **More than Five Years  to Ten Years** | ** ** | **More than Ten Years** | ** ** | **Total**           | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|----------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|----------------------------------------|------------|---------------------|------------|
| ** **                               | ** ** | **Carrying  Value**                  | ** ** | **Weighted  Average  Yield**                                   | ** ** | **Carrying  Value**                                             | ** ** | **Weighted  Average  Yield**           | ** ** | **Carrying  Value** | ** ** | **Weighted  Average  Yield** | ** ** | **Carrying  Value** | ** ** | **Weighted  Average  Yield** | ** ** | **Carrying  Value** | ** ** | **Weighted  Average  Yield** | ** ** |
| ** **                               | ** ** | **(Dollars in thousands)** | ** ** |
| Obligations of  U.S. government agencies |       | $                                    | 17,065     |                                                           | 3.50       | %                                                               | $          | 15,279                                 |       | 4.97                | %          | $ | 10,000 |   | 3.93 | % | $ | — |   | — | % | $ | 42,344 |   | 4.13 | % |
| State and  political subdivisions        |       | —                               |       | —                                                         |       | —                                                          |       | —                                 |       | 9,479               |       | 5.54 |   | 14,647 |   | 6.14 |   | 24,126 |   | 5.91 |   |
| Mortgage-related  securities             |       | 715                                  |       | 4.07                                                           |       | 35,694                                                          |       | 3.99                                   |       | 13,200              |       | 4.55 |   | 109,760 |   | 5.22 |   | 159,369 |   | 4.89 |   |
| Corporate debt  securities               |       | 4,017                                |       | 4.57                                                           |       | —                                                          |       | —                                 |       | —              |       | — |   | — |   | — |   | 4,017 |   | 4.57 |   |
| Total                                    |       | $                                    | 21,797     |                                                           |       |                                                            | $          | 50,973                                 |       |                |       | $ | 32,679 |   |   |   | $ | 124,407 |   |   |   | $ | 229,856 |   |   |   |

 

 

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***Deposits*.**  Our primary source of funds is our depositaccounts, which are comprised of noninterest-bearing accounts, interest-bearingNOW accounts, money market accounts, savings accounts and certificates ofdeposit. These deposits are provided primarily by individuals and businesswithin our market areas.  Depositsdecreased $85.8 million, or 12.6%, for the year ended December 31, 2006primarily as a result of decreases in NOW accounts, certificates of deposit andsavings accounts due to the high level of competition and the nature of thesingle-relationship we have with our depositors.  Additionally, the decrease in NOW accountswas also attributable to the decrease in construction loans.  We require that our construction loanborrowers maintain a compensating balance, in the form of a NOW account, withus.  As these loans were paid off orrefinanced at other institutions the borrowers withdrew their compensatingbalance.  During 2005, our depositsdecreased by $122.9 million, or 15.3%, primarily as a result of decreased moneymarket accounts and certificates of deposit primarily due to lower rates ofinterest offered.  The decrease in moneymarket accounts and increase in NOW accounts reflected the addition of check writingfeatures to certain money market accounts in 2005 thereby causing $98.9 millionof such accounts to be reclassified as NOW accounts.  Deposits increased in 2004 by $81.4 million,or 11.2%.  This increase was primarilythe result of higher interest rates offered. Traditionally, we attempted to be the market leader in rates onlonger-term money market accounts and certificates of deposit.  However, in 2005, the new management, inconnection with planned reductions in the balance sheet, offered rates thatlagged the market as it attempted to allow the longer-term money marketaccounts and certificates of deposit to run-off, thereby shortening theduration of its liabilities.  Depositrates were increased to be more compettitve beginning in November 2005.

The followingtable sets forth the balances of our deposit products at the dates indicated.

** **

|                                      | ** ** | **At December 31,** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|
| ** **                           | ** ** | **2006**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **(In thousands)**       | ** ** |
|                                 |       |                          |       |   |   |   |   |
| Noninterest-bearing  demand accounts |       | $                             | 41,429     |   | $ | 37,876 |   | $ | 29,119 |   |
| NOW accounts                         |       | 50,717                        |       | 87,072 |   | 44,118 |   |
| Money market  accounts               |       | 29,770                        |       | 27,975 |   | 132,803 |   |
| Savings accounts                     |       | 64,338                        |       | 80,098 |   | 92,427 |   |
| Certificates of  deposit             |       | 410,280                       |       | 449,286 |   | 506,783 |   |
| Total                                |       | $                             | 596,534    |   | $ | 682,307 |   | $ | 805,250 |   |

 

The followingtable indicates the amount of jumbo certificates of deposit by time remaininguntil maturity as December 31, 2006. Jumbo certificates of deposit require minimum deposits of $100,000.  We did not have any brokered deposits as ofDecember 31, 2006.

** **

| Maturity Period            | ** ** | **Certificates  of Deposits** | ** ** |
|---------------------------------|------------|------------------------------------|------------|
| ** **                      | ** ** | **(In thousands)**            | ** ** |
| Three months or less            |       | $                                  | 9,299      |   |
| Over three through six  months  |       | 8,523                              |       |
| Over six through twelve  months |       | 15,354                             |       |
| Over twelve months              |       | 40,769                             |       |
| Total                           |       | $                                  | 73,945     |   |

 

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The followingtable sets forth the time deposits classified by rates at the dates indicated.

** **

|                     | ** ** | **Year Ended December 31,** | ** ** |
|---------------------|------------|--------------------------------------------|------------|
| ** **          | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **          | ** ** | **(In thousands)**                    | ** ** |
|                |       |                                       |       |   |   |   |   |
| 0.00 — 1.00%   |       | $                                          | —     |   | $ | — |   | $ | — |   |
| 1.01 — 2.00%   |       | —                                     |       | 77 |   | 96,618 |   |
| 2.01 — 3.00%   |       | 8,028                                      |       | 144,197 |   | 164,696 |   |
| 3.01 — 4.00%   |       | 160,416                                    |       | 210,739 |   | 143,561 |   |
| 4.01 — 5.00%   |       | 176,206                                    |       | 57,573 |   | 57,193 |   |
| 5.01 — 6.00%   |       | 45,852                                     |       | 16,332 |   | 17,300 |   |
| 6.01 — greater |       | 19,778                                     |       | 20,368 |   | 27,415 |   |
| Total               |       | $                                          | 410,280    |   | $ | 449,286 |   | $ | 506,783 |   |

 

The followingtable sets forth the amount and maturities of time deposits classified by ratesat December 31, 2006.

** **
| ** **          | ** ** | **Amount Due**                  | ** ** | ** **                                                | ** ** | ** **                                                   | ** ** |
|---------------------|------------|--------------------------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **          | ** ** | **Less Than  One Year**    | ** ** | **More Than  One Year to  Two Years** | ** ** | **More Than  Two Years to  Three Years** | ** ** | **More Than  Three Years** | ** ** | **Total** | ** ** | **Percent of   Total Time  Deposit  Accounts** | ** ** |
| ** **          | ** ** | **(Dollars in thousands)** | ** ** |
| 0.00 — 1.00%   |       | $                                    | —     |                                                      | $          | —                                                       |       | $ | — |   | $ | — |   | $ | — |   | — | % |
| 1.01 — 2.00%   |       | —                               |       | —                                                    |       | —                                                       |       | — |   | — |   | — |   |
| 2.01 — 3.00%   |       | 7,930                                |       | 15                                                        |       | —                                                       |       | 83 |   | 8,028 |   | 2.0 |   |
| 3.01 — 4.00%   |       | 97,777                               |       | 34,844                                                    |       | 17,882                                                       |       | 9,913 |   | 160,416 |   | 39.1 |   |
| 4.01 — 5.00%   |       | 105,840                              |       | 25,026                                                    |       | 30,713                                                       |       | 14,627 |   | 176,206 |   | 42.9 |   |
| 5.01 — 6.00%   |       | 9,300                                |       | 6,383                                                     |       | 10,101                                                       |       | 20,068 |   | 45,852 |   | 11.2 |   |
| 6.01 — greater |       | 2,888                                |       | 808                                                       |       | 5,251                                                        |       | 10,831 |   | 19,778 |   | 4.8 |   |
| Total               |       | $                                    | 223,735    |                                                      | $          | 67,076                                                       |       | $ | 63,947 |   | $ | 55,522 |   | $ | 410,280 |   | 100.0 | % |

 

The followingtable sets forth the time deposit activity for the periods indicated.

** **

|                                           | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                | ** ** | **(In thousands)**                    | ** ** |
|                                      |       |                                       |       |   |   |   |   |
| Beginning balance                         |       | $                                          | 449,286    |   | $ | 506,783 |   | $ | 495,651 |   |
| Decrease before  interest credited        |       | (55,740                                    | )          | (73,870 | ) | (4,109 | ) |
| Interest credited                         |       | 16,734                                     |       | 16,373 |   | 15,241 |   |
| Net increase (decrease)  in time deposits |       | (39,006                                    | )          | (57,497 | ) | 11,132 |   |
| Ending balance                            |       | $                                          | 410,280    |   | $ | 449,286 |   | $ | 506,783 |   |

 

39

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***Borrowings*. **We utilize borrowings from the FederalHome Loan Bank of Pittsburgh to supplement our supply of funds for loans andinvestments.

** **

|                                                                            | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                 | ** ** | **(Dollars in thousands)**       | ** ** |
|                                                                       |       |                                       |       |   |   |   |   |
| Maximum amount of  advances outstanding at any month end during the period |       | $                                          | 30,000     |   | $ | 30,000 |   | $ | 30,000 |   |
| Average advances  outstanding during the period                            |       | 30,000                                     |       | 30,000 |   | 30,000 |   |
| Weighted average  interest rate during the period                          |       | 4.88                                       | %          | 4.88 | % | 4.88 | % |
| Balance outstanding at  end of period                                      |       | $                                          | 30,000     |   | $ | 30,000 |   | $ | 30,000 |   |
| Weighted average interest rate at end of period                            |       | 4.88                                       | %          | 4.88 | % | 4.88 | % |

 

**Resultsof Operations for the Years Ended December 31, 2006, 2005 and 2004**

***Overview.***

** **

|                                  | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                       | ** ** | **(Dollars in thousands)**        | ** ** |
|                             |       |                                        |       |   |   |   |   |
| Net income (loss)                |       | $                                           | 3,634      |   | $ | 5,960 |   | $ | (1,888 | ) |
| Return on average  assets        |       | 0.49                                        | %          | 0.71 | % | (0.21 | )% |
| Return on average  equity        |       | 4.59                                        |       | 9.50 |   | (2.82 | ) |
| Average equity to average assets |       | 10.58                                       |       | 7.44 |   | 7.59 |   |
|                                  |            |                                             |            |  |  |  |  |  |  |  |

 

***2006 vs. 2005.***  Net income decreased $2.3 million for 2006compared to 2005 primarily due to a $1.8 million increase in salaries, benefitsand other compensation as well as a $1.5 million contribution to the Fox ChaseCharitable Foundation, offset by an increase in noninterest income and decreasein income tax expense.

 ***2005 vs. 2004.**** *Net income increased$7.8 million for 2005 compared to 2004 primarily due to a $6.0 million creditto the allowance for loan losses in 2005 compared to a provision for loanlosses of $12.3 million in 2004, offset by a decrease in net interest incomeand noninterest income and increases in noninterest expenses.

***Net Interest Income.***

***2006 vs. 2005*.**  Net interest income decreased by $186,000, or1.1%, to $16.7 million in 2006.  Totalinterest income decreased $424,000, or 1.1%, to $37.2 million for 2006, due toa decrease of $4.0 million in interest and fees on loans, offset by a $2.4million increase in interest income on mortgage-related securities and a $1.2million increase in other interest income. The increase in other interest income was primarily the result of theproceeds from the Company’s stock offering being invested in short-termovernight deposits.  Interest income onloans decreased $4.0 million, or 15.5%, to $21.7 million between the periodsdue to a decrease of $95.7 million in the average outstanding balance of loans,offset by a 40 basis point increase in the average yield due primarily tohigher market interest rates.  Interestand dividend income on securities and overnight investments increased $3.6million, or 29.9% to $12.9 million between the periods primarily due to a 128basis point increase in the yield on mortgage-related securities and theinvestment of the proceeds from the Bank’s conversion to a public entity.

Total interestexpense decreased $238,000, or 1.1%, to $20.5 million for 2006, due primarilyto a $117.2 million decrease in the average balance of deposits which resultedin a reduction of interest expense of $2.7 million, offset by an increase inthe average rate paid on deposits of 49 basis points, resulting in a $2.5million increase in interest expense.

***2005 vs. 2004.***  Net interest income decreased by $969,000, or5.4%, to $16.9 million in 2005.  Totalinterest income increased $35,000, or 0.1%, to $37.6 million for 2005, asincreases in interest and dividends on securities were offset by a decrease ininterest income on loans.  Interestincome on loans decreased 6.1% to $25.7 

40

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million between theperiods due to an decrease in average balances and a 15 basis point decrease inthe average yield. Interest and dividend income on securities increased 6.8% to$10.3 million between the periods due to an increase in average yield asproceeds from maturing or sold securities were reinvested into securities witha higher yield.  Securities alsoincreased due to an increase in the average balances.

Total interestexpense increased $1.0 million or 5.1% to $20.7 million for 2005, due primarilyto a 27 basis point increase in average deposit costs, which was partiallyoffset by a $39.1 million decrease in average balances.  The decrease in average balances was causedby a  $20.8 million decrease in theaverage balance of certificates of deposit, a $9.7 million decrease in NOW andmoney market deposit accounts and an $8.6 million decrease in the averagebalance of savings accounts.  Due to thelending restrictions imposed on us by the Office of Thrift Supervision in 2005,we had reduced liquidity needs and allowed these deposits to run-off.

41

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***Average Balances and Yields.**** *Thefollowing table presents information regarding average balances of assets andliabilities, the total dollar amounts of interest income and dividends fromaverage interest-earning assets, the total dollar amounts of interest expenseon average interest-bearing liabilities, and the resulting annualized averageyields and costs.  The yields and costsfor the periods indicated are derived by dividing income or expense by theaverage balances of assets or liabilities, respectively, for the periodspresented.  For purposes of this table,average balances have been calculated using month-end balances, and nonaccrualloans are included in average balances only. Management does not believe that the use of month-end balances insteadof daily average balances has caused any material differences in theinformation presented.  Loan fees areincluded in interest income on loans and are insignificant.  Yields are not presented on a tax-equivalentbasis.  Any adjustments necessary topresent yields on a tax-equivalent basis are insignificant.

** **
| ** **                                                               | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                               | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                               | ** ** | **Average  Balance**                        | ** ** | **Interest  and  Dividends** | ** ** | **Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest  and  Dividends** | ** ** | **Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest  and  Dividends** | ** ** | **Yield/  Cost** | ** ** |
| ** **                                                               | ** ** | **(Dollars in thousands)**        | ** ** |
|                                                                     |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Assets:**                                                              |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                                |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  demand deposits                                        |       | $                                           | 49,182     |   | $ | 2,573 |   | 5.23 | % | $ | 43,973 |   | $ | 1,549 |   | 3.53 | % | $ | 38,507 |   | $ | 511 |   | 1.33 | % |
| Mortgage-backed  securities                                              |       | 184,558                                     |       | 8,035 |   | 4.35 |   | 183,931 |   | 5,641 |   | 3.07 |   | 185,135 |   | 5,178 |   | 2.80 |   |
| Taxable  securities                                                      |       | 100,271                                     |       | 3,893 |   | 3.88 |   | 120,732 |   | 3,935 |   | 3.26 |   | 131,479 |   | 3,787 |   | 2.88 |   |
| Nontaxable  securities                                                   |       | 23,427                                      |       | 934 |   | 3.99 |   | 20,298 |   | 754 |   | 3.71 |   | 17,833 |   | 704 |   | 3.95 |   |
| Loans                                                                    |       | 359,964                                     |       | 21,742 |   | 6.04 |   | 455,711 |   | 25,722 |   | 5.64 |   | 472,763 |   | 27,386 |   | 5.79 |   |
| Allowance  for loan losses                                               |       | (7,057                                      | )          | — |   | — |   | (13,849 | ) | — |   | — |   | (3,133 | ) | — |   | — |   |
| Net  loans                                                               |       | 352,907                                     |       | 21,742 |   | 6.04 |   | 441,862 |   | 25,722 |   | 5.64 |   | 469,630 |   | 27,386 |   | 5.79 |   |
| Total  interest-earning assets                                           |       | 710,345                                     |       | 37,177 |   | 5.29 |   | 810,796 |   | 37,601 |   | 4.56 |   | 842,584 |   | 37,566 |   | 4.44 |   |
|                                                                     |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-earning  assets                                              |       | 37,461                                      |       |   |   |   |   | 30,765 |   |   |   |   |   | 40,123 |   |   |   |   |   |
| Total  assets                                                            |       | $                                           | 747,806    |   |   |   |   |   | $ | 841,561 |   |   |   |   |   | $ | 882,707 |   |   |   |   |   |
|                                                                     |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities and equity:**                                              |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW  and money market deposit accounts                                   |       | $                                           | 90,129     |   | 1,683 |   | 1.87 |   | $ | 137,370 |   | 2,091 |   | 1.52 |   | $ | 147,070 |   | 2,059 |   | 1.40 |   |
| Savings  accounts                                                        |       | 75,212                                      |       | 557 |   | 0.74 |   | 88,501 |   | 748 |   | 0.85 |   | 97,103 |   | 904 |   | 0.93 |   |
| Certificates  of deposit                                                 |       | 430,736                                     |       | 16,734 |   | 3.88 |   | 487,401 |   | 16,373 |   | 3.36 |   | 508,235 |   | 15,241 |   | 3.00 |   |
| Total  interest-bearing deposits                                         |       | 596,077                                     |       | 18,974 |   | 3.18 |   | 713,272 |   | 19,212 |   | 2.69 |   | 752,408 |   | 18,204 |   | 2.42 |   |
|                                                                     |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| FHLB  advances                                                           |       | 30,000                                      |       | 1,485 |   | 4.88 |   | 30,000 |   | 1,485 |   | 4.88 |   | 30,000 |   | 1,489 |   | 4.88 |   |
| Total  interest-bearing liabilities                                      |       | 626,077                                     |       | 20,459 |   | 3.27 |   | 743,272 |   | 20,697 |   | 2.78 |   | 782,408 |   | 19,693 |   | 2.52 |   |
|                                                                     |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  deposits                                            |       | 36,245                                      |       |   |   |   |   | 33,054 |   |   |   |   |   | 27,092 |   |   |   |   |   |
| Other  noninterest-bearing liabilities                                   |       | 6,342                                       |       |   |   |   |   | 2,507 |   |   |   |   |   | 6,174 |   |   |   |   |   |
| Total  liabilities                                                       |       | 668,664                                     |       |   |   |   |   | 778,833 |   |   |   |   |   | 815,674 |   |   |   |   |   |
|                                                                     |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Retained  earnings                                                       |       | 80,183                                      |       |   |   |   |   | 64,565 |   |   |   |   |   | 67,162 |   |   |   |   |   |
| Accumulated  comprehensive income                                        |       | (1,041                                      | )          |   |   |   |   | (1,837 | ) |   |   |   |   | (129 | ) |   |   |   |   |
|                                                                     |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  equity                                                            |       | $                                           | 79,142     |   |   |   |   |   | $ | 62,728 |   |   |   |   |   | $ | 67,033 |   |   |   |   |   |
|                                                                     |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  liabilities and equity                                            |       | $                                           | 747,806    |   |   |   |   |   | $ | 841,561 |   |   |   |   |   | $ | 882,707 |   |   |   |   |   |
|                                                                     |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  interest income                                                     |       |                                        |       | $ | 16,718 |   |   |   |   |   | $ | 16,904 |   |   |   |   |   | $ | 17,873 |   |   |   |
| Interest  rate spread                                                    |       |                                        |       |   |   | 2.02 | % |   |   |   |   | 1.78 | % |   |   |   |   | 1.92 | % |
| Net  interest margin                                                     |       |                                        |       |   |   | 2.33 | % |   |   |   |   | 2.05 | % |   |   |   |   | 2.11 | % |
| Average interest-earning  assets to average interest-bearing liabilities |       |                                        |       |   |   | 113.46 | % |   |   |   |   | 109.08 | % |   |   |   |   | 107.69 | % |

 

 

42

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***Rate/Volume Analysis*.**  The following table sets forth the effects ofchanging rates and volumes on our net interest income.  The rate column shows the effectsattributable to changes in rate (changes in rate multiplied by priorvolume).  The volume column shows theeffects attributable to changes in volume (changes in volume multiplied byprior rate).  The net column representsthe sum of the prior columns.  Forpurposes of this table, changes attributable to changes in both rate and volumethat cannot be segregated have been allocated proportionally based on thechanges due to rate and the changes due to volume.

** **
| ** **                          | ** ** | **Year Ended  December 31, 2006  Compared to  Year Ended December 31, 2005** | ** ** | **Year Ended  December 31, 2005  Compared to  Year Ended December 31, 2004** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **Increase (Decrease)  Due to**                                                                            | ** ** | ** **                                                                                                           | ** ** | **Increase (Decrease)  Due to** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Volume**                                                                                                           | ** ** | **Rate**                                                                                                             | ** ** | **Net** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Net** | ** ** |
| ** **                          | ** ** | ** **                                                                                                           | ** ** | ** **                                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest and dividend  income:      |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |   |   |   |   |
| Interest-earning  demand deposits   |       | $                                                                                                                    | 185        |                                                                                                                 | $          | 839 |   | $ | 1,024 |   | $ | 72 |   | $ | 966 |   | $ | 1,038 |   |
| Loans                               |       | (5,404                                                                                                               | )          | 1,424                                                                                                                |       | (3,980 | ) | (988 | ) | (676 | ) | (1,664 | ) |
| Mortgage-backed  securities         |       | 19                                                                                                                   |       | 2,375                                                                                                                |       | 2,394 |   | (34 | ) | 497 |   | 463 |   |
| Taxable  securities                 |       | (667                                                                                                                 | )          | 625                                                                                                                  |       | (42 | ) | (310 | ) | 458 |   | 148 |   |
| Nontaxable  securities              |       | 116                                                                                                                  |       | 64                                                                                                                   |       | 180 |   | 97 |   | (47 | ) | 50 |   |
| Total  interest-earning assets      |       | (5,751                                                                                                               | )          | 5,327                                                                                                                |       | (424 | ) | (1,163 | ) | 1,198 |   | 35 |   |
|                                |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |   |   |   |   |
| Interest expense:                   |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |   |   |   |   |
| NOW and money  market deposits      |       | (719                                                                                                                 | )          | 311                                                                                                                  |       | (408 | ) | (136 | ) | 168 |   | 32 |   |
| Savings accounts                    |       | (112                                                                                                                 | )          | (78                                                                                                                  | )          | (191 | ) | (80 | ) | (76 | ) | (156 | ) |
| Certificates of  deposit            |       | (1,904                                                                                                               | )          | 2,264                                                                                                                |       | 361 |   | (625 | ) | 1,757 |   | 1,132 |   |
| Total  interest-bearing deposits    |       | (2,735                                                                                                               | )          | 2,497                                                                                                                |       | (238 | ) | (841 | ) | 1,849 |   | 1,008 |   |
|                                |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |   |   |   |   |
| FHLB advances                       |       | —                                                                                                               |       | —                                                                                                               |       | —   |   |   |   | (4 | ) | (4 | ) |
| Total  interest-bearing liabilities |       | (2,735                                                                                                               | )          | 2,497                                                                                                                |       | (238 | ) | (841 | ) | 1,845 |   | 1,004 |   |
|                                |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |   |   |   |   |
| Net change in interest income       |       | $                                                                                                                    | (3,016     | )                                                                                                                    | $          | 2,830 |   | $ | (186 | ) | $ | (322 | ) | $ | (647 | ) | $ | (969 | ) |

 

***Provision for Loan Losses.***

***2006 vs. 2005. ***Wehad a credit to the provision for loan losses of $5.4 million in 2006 comparedto a credit of $6.0 million in 2005.  The2006 credit to the provision reflected: (1) continued reductions in the levelsof criticized and classified loans from $34.7 million at December 31, 2005to $5.0 million at December 31, 2006 due to the collection on one of theBank’s significant nonperforming loans totaling $2.5 million; (2) the absenceof charge-offs in 2006; and (3) a $16.3 million, or 4.3%, decrease in the sizeof the loan portfolio, including a $19.4 million, or 62.7%, decrease in theconstruction portfolio, which carries higher risk of default than one-to fourfamily residential real estate loans.

***2005 vs. 2004.***   We had a credit to the provision for loanlosses of $6.0 million in 2005 compared to a provision of $12.3 million in2004.  The 2005 credit to the provisionwas substantially impacted by the new management team and board of directorswho launched initiatives to collect loans at the New Jersey shore area, gathersufficient borrower information to properly document existing loans whenpossible, assign proper risk grades to loans following newly implemented creditrisk assessment policies, establish and maintain well documented estimates forthe allowance for loan losses, and establish appropriate underwriting, creditadministration, and prudent credit risk management policies and procedures.  Also, various high-risk construction loans inour New Jersey market area were rescinded or refinanced with other financialinstitutions.  Additionally, certainborrowers were removed from classified status due to improvements indocumentation on their loans or in the credit profile of the borrower.  As a result of these actions and continuedfavorable economic conditions at the New Jersey shore area, criticized andclassified assets were reduced from $90.7 million at December 31, 2004 to $40.9million at December 31, 2005, thus reducing the need for allowance for loanlosses, which resulted in the $6.0 million credit to 

43

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the provision for loanlosses.  The reduction in the allowancealso reflected the absence of significant charge-offs in 2005 and a $123.2 million,or 24.7%, decrease in the size of the loan portfolio, including a $52.7million, or 61.5%, decrease in the multi-family and commercial real estateportfolio and a $61.2 million, or 66.4%, decrease in the constructionportfolio, both of which carry higher risk of default than one- to four-familyresidential real estate loans. Additionally, the credit to the provision for loan losses reflected theengagement of three independent loan consultants to separately assess thecredit quality of the loan portfolio and the classification of assets and toassist with establishing proper risk-weighting of loans.

An analysis of thechanges in the allowance for loan losses is presented under “*—Risk Management—Analysis and Determination of theAllowance for Loan Losses*.”

***Noninterest Income.***  The following table shows the components ofnoninterest income for the years ended 2006, 2005 and 2004.

** **
| ** **                                            | ** ** | **Years Ended December 31,** | ** ** | **% Change** | ** ** | **% Change** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                            | ** ** | **2006**                                    | ** ** | **2005**          | ** ** | **2004**          | ** ** | **2006/2005** | ** ** | **2005/2004** | ** ** |
| ** **                                            | ** ** | **(In thousands)**                     | ** ** | ** **        | ** ** | ** **        | ** ** |
|                                                  |       |                                        |       |              |       |              |       |   |   |   |   |
| Service charges  and other fee income                 |       | $                                           | 1,037      |              | $          | 775               |       | $ | 937 |   | 33.8 | % | (17.3 | )% |
| Net gain (loss)  on sale of:                          |       |                                        |       |              |       |              |       |   |   |   |   |
| Loans                                                 |       | 199                                         |       | 567               |       | 279               |       | (64.9 | ) | 103.2 |   |
| Assets acquired through foreclosure                   |       | 85                                          |       | 6                 |       | 24                |       | 1,316.7 |   | (75.0 | ) |
| Fixed assets                                          |       | (59                                         | )          | (161              | )          | (4                | )          | (63.4 | ) | (3,925.0 | ) |
| Mortgage-related securities                           |       | —                                      |       | 108               |       | 28                |       | (100.0 | ) | 285.7 |   |
| Securities  (losses) gains and impairment losses, net |       | (17                                         | )          | (917              | )          | 141               |       | (98.2 | ) | (750.4 | ) |
| Income on  bank-owned life insurance                  |       | 427                                         |       | 448               |       | 447               |       | (4.7 | ) | 0.2 |   |
| Other                                                 |       | 401                                         |       | 388               |       | 427               |       | 3.4 |   | (9.1 | ) |
| Total                                                 |       | $                                           | 2,073      |              | $          | 1,214             |       | $ | 2,279 |   | 70.8 |   | (46.7 | ) |

 

***2006 vs. 2005*.**   Noninterest income increased primarily dueto a $917,000 loss on sale and impairment of securities that was recorded in2005 as discussed further below.  Suchlosses in 2006 totalled only $17,000 in connection with the sale of mutualfunds.  Also, service charges and otherfee income increased due to increased loan servicing fee income associated withthe larger portfolio of loans serviced for others in 2006 compared to 2005.  These increases were offset by decreases inthe gain on the sale of mortgage-related securities and the gain on sale ofloans.  The decrease in the gain on thesale of loans was due to approximately $24.9 million loans being sold in theyear ended December 31, 2006 compared to approximately $83.3 million loansbeing sold in 2005.

***2005 vs. 2004. ***During2005, noninterest income decreased due primarily to a decrease in servicecharges and losses on the sale of securities and impairment losses and fixedassets, offset by an increase in the gain on the sale of loans.  Service charges and other fee incomedecreased due to the decrease in money market accounts and due to a change inthe fee structure in connection with deposit account overdrafts.  The loss on the sale of available-for-salesecurities in 2005 reflected the sale of lower-yielding adjustable-rateperpetual preferred stock of Freddie Mac in an effort to reposition thesecurities portfolio towards higher-yielding investments.  The increase in gain on the sale of loans in2005 was due to approximately $83.8 million of loans being sold in 2005compared to $45.7 million in 2004.  Theloss on the sale of fixed assets in 2005 was due to the sale, transfer andwrite-down of various assets, primarily older computer equipment.  The impairment loss in 2005 was the result ofthe determination by management that an investment in a mutual fund wasother-than-temporarily impaired.  This mutualfund investment was sold in March 2006. An additional loss of $17,000 was recorded at the sale date.

44

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***Noninterest Expenses.***  The following table shows the components ofnoninterest expenses and the percentage changes for the years ended 2006, 2005and 2004.

** **
| ** **                                  | ** ** | **Years Ended December 31,** | ** ** | **% Change** | ** ** | **% Change** | ** ** |
|---------------------------------------------|------------|---------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                  | ** ** | **2006**                                    | ** ** | **2005**          | ** ** | **2004**          | ** ** | **2006/2005** | ** ** | **2005/2004** | ** ** |
| ** **                                  | ** ** | **(In thousands)**                     | ** ** | ** **        | ** ** | ** **        | ** ** |
|                                        |       |                                        |       |              |       |              |       |   |   |   |   |
| Salaries,  benefits and other compensation  |       | $                                           | 9,194      |              | $          | 7,442             |       | $ | 5,875 |   | 23.5 | % | 26.7 | % |
| Occupancy  expense                          |       | 1,567                                       |       | 1,740             |       | 1,499             |       | (9.9 | ) | 16.1 |   |
| Furniture and  equipment expense            |       | 1,048                                       |       | 814               |       | 687               |       | 28.8 |   | 18.5 |   |
| Data processing  costs                      |       | 1,514                                       |       | 1,452             |       | 1,242             |       | 4.3 |   | 16.9 |   |
| Professional  fees                          |       | 1,853                                       |       | 1,127             |       | 419               |       | 64.4 |   | 169.0 |   |
| Marketing  expense                          |       | 621                                         |       | 373               |       | 407               |       | 66.5 |   | (8.4 | ) |
| FDIC premiums                               |       | 796                                         |       | 765               |       | 115               |       | 4.1 |   | 565.2 |   |
| Charitable  Foundation Contribution Expense |       | 1,500                                       |       | —            |       | —            |       | — |   | — |   |
| Other                                       |       | 1,774                                       |       | 1,495             |       | 1,109             |       | 18.7 |   | 34.8 |   |
| Total                                       |       | $                                           | 19,867     |              | $          | 15,208            |       | $ | 11,353 |   | 30.6 |   | 34.0 |   |

 

***2006 vs. 2005***.  In 2006, noninterest expense increased due toa $1.5 million contribution to the Fox Chase Charitable Foundation, which wasestablished and funded in connection with the Bank’s mutual holding companyreorganization. The increase was also due to increases in salaries, benefitsand other compensation, furniture and equipment expense, professional fees,marketing expenses and other operating expenses. The increased salaries,benefits and other compensation reflected the hiring of nineteen commerciallending and commercial credit and risk management professionals since 2005 andthe additional staff hired in connection with the opening of our Marmora branchoffice in March 2006. The Company also recorded compensation expense of$512,000 in the fourth quarter of 2006 related to the first year’s allocationfrom the recently implemented Fox Chase Bank Employee Stock OwnershipPlan.  Furniture and equipment expensesincreased $234,000 due to an increase in depreciation related expense forcertain assets whose depreciable lives were corrected in 2006, and to a lesserextent due to the opening of the new Marmora branch office and two new loanproduction offices.  Professional feesincreased $726,000 due to the hiring of consulting firms to assist with theimplementation of internal policies and procedures related to theSarbanes-Oxley Act as well as fees related to various strategic considerationsthe Company is considering.   FDICpremiums are expected to be reduced to levels experienced in 2004 as a resultof the lifting of our troubled designation status in June 2006.  Other expenses for 2006 also includes anadjustment of $232,000 related to errors in prior periods in the procedures forclosing and reconciling transactions in our automated teller machinesystem.  Such errors were discovered in2006 and an analysis of the materiality of this adjustment, along with thedepreciation adjustment, was completed and management concluded that theseitems were not material to any of the historical periods presented herein.

***2005 vs. 2004. ***In2005, noninterest expenses increased due primarily to increases in salaries,benefits and other compensation, occupancy, furniture and equipment expense,data processing costs, professional fees and Federal Deposit InsuranceCorporation premiums.  The increase insalaries, benefits and other compensation was the result of the increase in thenumber of employees due to a new branch opening in December 2004 and additionalstaff hired to assist in the increased loan collection efforts and $375,000related to the freezing of the pension plan, effective December 31, 2005.  Salaries, benefits and other compensationreflected increases between 2005 and 2004 since the Bank was unable to deferloan origination costs in 2005 due to the regulatory prohibition on originatingcertain types of loans.  In 2004, theBank deferred approximately $1.1 million of such costs.  Occupancy, furniture and equipment expenseincreased due to a new branch that opened in December 2004.  Data processing costs increased due to theopening of the new branch and due to additional costs in connection withnew  technology implemented in 2005.  Professional fees increased in 2005 due toadditional legal fees to assist with compliance with the Cease and Desist Orderinstituted by the Office of Thrift Supervision in June 2005, and additionalprofessionals that were hired to conduct loan reviews, monitor the creditquality of the loan portfolio and assist with interest rate riskmanagement.  The increased FederalDeposit Insurance Corporation premiums resulted from our designation by theOffice of Thrift Supervision as a troubled institution for regulatory purposesin January 2005.  However, due to thelifting of our troubled institution designation in June 2006, we anticipatethat our Federal Deposit Insurance Corporation premiums will return to historiclevels.  Other expenses increased in 2005due to our inability to defer loan expense in 2005 due to the regulatoryprohibition on originating certain types of loans, to an increase in search 

45

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and recording fees ofapproximately $70,000 relating to criticized and classified loans and toincreased assessments by the Office of Thrift Supervision due to our troubledinstitution designation.

***Income Taxes.***

***2006 vs. 2005.***  Income tax expense for 2006 was $684,000compared to $3.0 million for 2005.  Thedecrease in 2006 was primarily due to a $4.6 million decrease in pre-tax netincome.  The effective tax rate for 2006and 2005 was 15.8% and 33.3%, respectively. The effective tax rate in 2006 was lower than the statutory federal taxrate of 34.0% primarily due to the Company reversing a valuation allowance of$312,000 it had established in 2005 for possible non-realizable deferred taxasset benefits associated with certain capital loss carryforwards.  The Bank entered into an agreement to sellone of its office facilities in the fourth quarter of 2006 that is projected toresult in sufficient capital gain income to utilize such capital losscarryforwards.

***2005 vs. 2004.***  Income tax expense for 2005 was $3.0 millioncompared to a benefit of $1.6 million for 2004. The increase in 2005 was primarily due to $8.9 million in pre-tax netincome compared to a pre-tax loss of $3.5 million in 2004.  The effective tax rate for 2005 and 2004 was33.3% and (45.8%), respectively.  Theeffective tax rate in 2005 was lower than the statutory federal tax rate of34.0% due to the higher level of tax-exempt income as a percentage of pre-taxbook income, net of additional income tax expense recognized in 2005 due to ourinability to recognize tax benefits associated with capital losses recorded onthe sale and write-down of certain investments during 2005.

**RiskManagement**

***Overview.***  Managing risk is an essential part ofsuccessfully managing a financial institution. Our most prominent riskexposures are credit risk, interest rate risk and market risk. Credit risk isthe risk of not collecting the interest and/or the principal balance of a loanor investment when it is due. Interest rate risk is the potential reduction ofnet interest income as a result of changes in interest rates. Market riskarises from fluctuations in interest rates that may result in changes in thevalues of financial instruments, such as available-for-sale securities, thatare accounted for on a mark-to-market basis. Other risks that we face areoperational risks, liquidity risks and reputation risk. Operational risksinclude risks related to fraud, regulatory compliance, processing errors,technology and disaster recovery. Liquidity risk is the possible inability to fund obligations todepositors, lenders or borrowers due to unforeseen circumstances.  Reputation risk is the risk that negativepublicity or press, whether true or not, could cause a decline in our customerbase or revenue.

***Credit RiskManagement.***  Ourstrategy for credit risk management focuses on having well-defined creditpolicies and uniform underwriting criteria and providing prompt attention topotential problem loans.  Historically,this strategy also emphasizes the origination of one- to four-family mortgageloans, which typically have lower default rates than other types of loans andare secured by collateral that generally tends to appreciate in value.

When a borrowerfails to make a required loan payment, we take a number of steps to attempt tohave the borrower cure the delinquency and restore the loan to current status.When the loan becomes 15 days past due, a late notice is generated and sent tothe borrower.  A second notice is sentand phone calls are made ten days later. If payment is not received by the 30thday of delinquency, a further notification is sent to the borrower.  If payment is not received by the 45th day of delinquency for a loan on aPennsylvania property or the 60th day of delinquency for a loan on a New Jerseyproperty, a notice is sent to the borrower advising them that they have aspecified period of time to cure their default before legal action begins.  If no successful workout can be achieved,after a loan becomes 90 days delinquent, we typically commence foreclosure orother legal proceedings. If a foreclosure action is instituted and the loan isnot brought current, paid in full, or refinanced before the foreclosure sale,the real property securing the loan generally is sold at foreclosure. We alsomay consider loan workout arrangements with certain borrowers under certaincircumstances.

Management reports to the Board of Directors or acommittee of the Board monthly regarding the amount of loans delinquent morethan 30 days, all loans in foreclosure and all foreclosed and repossessedproperty that we own.

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***Analysis ofNonperforming and Classified Assets.***  We consider repossessed assets and loans thatare 90 days or more past due to be nonperforming assets. Loans are generallyplaced on nonaccrual status when they become 90 days delinquent at which timethe accrual of interest ceases and the allowance for any uncollectible accruedinterest is established and charged against operations. Typically, paymentsreceived on a nonaccrual loan are applied to the outstanding principal andinterest as determined at the time of collection of the loan.

Real estate thatwe acquire as a result of foreclosure or by deed-in-lieu of foreclosure isclassified as foreclosed assets until it is sold. When property is acquired, itis initially recorded at the lower of its cost or market value, less estimateselling expenses. Holding costs and declines in fair value after acquisition ofthe property result in charges against income.

The following tableprovides information with respect to our nonperforming assets at the datesindicated.  We did not have any troubleddebt restructurings at the dates presented.

** **
| ** **                                                                            | ** ** | **At December 31,**        | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                            | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Nonaccrual  loans:                                                                    |       |                                 |       |   |   |   |   |   |   |   |   |
| One- to four-family                                                                   |       | $                                    | 284        |   | $ | 548 |   | $ | 1,442 |   | $ | 1,324 |   | $ | 1,314 |   |
| Multi-family and commercial real estate                                               |       | —                               |       | 2,972 |   | — |   | — |   | — |   |
| Total                                                                                 |       | 284                                  |       | 3,520 |   | 1,442 |   | 1,324 |   | 1,314 |   |
|                                                                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Accruing loans  past due 90 days or more:                                             |       |                                 |       |   |   |   |   |   |   |   |   |
| Multi-family and commercial real estate                                               |       | 2,941                                |       | 1,574 |   | — |   | — |   | — |   |
| Total                                                                                 |       | 2,941                                |       | 1,574 |   | — |   | — |   | — |   |
| Total of nonaccrual loans and accruing loans 90 days  or more past due                |       | $                                    | 3,225      |   | $ | 5,094 |   | $ | 1,442 |   | $ | 1,324 |   | $ | 1,314 |   |
|                                                                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Real estate  owned                                                                    |       | —                               |       | 107 |   | — |   | — |   | — |   |
|                                                                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Total nonperforming assets                                                            |       | $                                    | 3,225      |   | $ | 5,201 |   | $ | 1,442 |   | $ | 1,324 |   | $ | 1,314 |   |
|                                                                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Total nonperforming loans and accruing loans past  due 90 days or more to total loans |       | 0.90                                 | %          | 1.36 | % | 0.29 | % | 0.32 | % | 0.32 | % |
| Total  nonperforming loans to total assets                                            |       | 0.43                                 |       | 0.65 |   | 0.16 |   | 0.16 |   | 0.17 |   |
| Total nonperforming  assets to total assets                                           |       | 0.43                                 |       | 0.67 |   | 0.16 |   | 0.16 |   | 0.17 |   |

 

AtDecember 31, 2006, accruing multi-family and commercial estate loansincluded one loan that was past its contractual maturity.  This loan is secured by a beachfrontundeveloped parcel of land in the southern New Jersey shore area.  While the property is past maturity, theborrower has paid all interest due.  TheBank is presently seeking to extend the term of this loan to provide adequatetime for the borrower to sell the property.

Interest incomethat would have been recorded for the year ended December 31, 2006 had nonaccruingloans been current according to their original terms was $10,000, none of whichwas included in interest income for the year ended December 31, 2006.

                Federal regulations require us to review and classifyour assets on a regular basis. In addition, the Office of Thrift Supervisionhas the authority to identify problem assets and, if appropriate, require themto be classified. There are three classifications for problem assets:substandard, doubtful and loss. “Substandard assets” must have one or moredefined weaknesses and are characterized by the distinct possibility that wewill sustain some loss if the deficiencies are not corrected. “Doubtful assets”have the weaknesses of substandard assets with the additional characteristicthat the weaknesses make collection or liquidation in full on the basis ofcurrently existing facts, conditions and values questionable, and there is ahigh possibility of loss. An asset classified “loss” is considereduncollectible and of such little value that continuance as an asset of theinstitution is not warranted. The regulations also provide for a “specialmention” category, described as assets which do not currently expose us to asufficient 

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degree of risk to warrantclassification but do possess credit deficiencies or potential weaknessesdeserving our close attention.  When weclassify a loan as special mention, substandard or doubtful, we generallyestablish a specific allowance for loan losses for that loan.  If we classify an asset as loss, we allocatean amount equal to 100% of the portion of the asset classified loss.

The followingtable shows the aggregate amounts of our criticized and classified assets atthe dates indicated.

** **

|                          | ** ** | **At December 31,** | ** ** |
|--------------------------|------------|-------------------------------|------------|
| ** **               | ** ** | **2006**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **               | ** ** | **(In thousands)**       | ** ** |
|                     |       |                          |       |   |   |   |   |
| Special mention  assets  |       | $                             | 3,225      |   | $ | 19,529 |   | $ | 10,055 |   |
| Substandard  assets      |       | 5,764                         |       | 17,610 |   | 80,600 |   |
| Doubtful assets          |       | —                        |       | 3,720 |   | — |   |
| Total classified  assets |       | $                             | 8,989      |   | $ | 40,859 |   | $ | 90,655 |   |

 

At December 31, 2006, substandard assets includedtwo residential loans to the same borrower totaling $1.7 million and twosub-investment grade corporate bonds totaling $4.0 million which matured inJanuary and February 2007.  Thesubstandard loans consisted of two residential loans, the larger of which isfinancing on a four-unit apartment that the borrower is seeking to convert toseparate condominium units and sell.  Theborrower is current on all amounts due at December 31, 2006,  but does not have sufficient liquidity to paythe loan if the units are not sold within a short timeframe.   Special mention assets include one loan totaling$2.9 million which is secured by a beachfront undeveloped parcel of land in thesouthern New Jersey shore area.  Whilethe property is past maturity, the borrower has paid all interest due.  The Bank is presently seeking to extend theterm of this loan to provide adequate time for the borrower to sell theproperty.  The collateral is sufficientto pay the loan upon liquidation.

The decreases in classified assets in 2006 and 2005reflected increased collection efforts as well as the Bank requiring certainhigh-risk construction loans in our New Jersey market area to be rescinded orrefinanced with other financial institutions. During 2006, the Bank collected all of its significant nonperformingcommercial and construction loans by establishing workout strategies thatallowed the borrowers sufficient time to resolve their business difficultiesand/or sell the collateral and repay the Bank. The decrease in classified assets also included the maturity of $2.1million of sub-investment grade corporate bonds during 2006.  Additionally, certain borrowers were removedfrom classified status due to improvements in documentation on their loans orin the credit profile of the borrower.

Other thandisclosed in the above tables, there are no other loans at December 31,2006 that management has serious doubts about the ability of the borrowers tocomply with the present loan repayment terms.

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***Delinquencies*. **The following table provides informationabout delinquencies in our loan portfolio at the dates indicated

** **
| ** **                            | ** ** | **At December 31,**  | ** ** |
|---------------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **2006**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                            | ** ** | **30-59  Days  Past Due** | ** ** | **60-89  Days  Past Due** | ** ** | **30-59  Days  Past Due** | ** ** | **60-89  Days  Past Due** | ** ** | **30-59  Days  Past Due** | ** ** | **60-89  Days  Past Due** | ** ** |
| ** **                            | ** ** | **(In thousands)**        | ** ** |
| Residential real  estate:             |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| One- to four-family                   |       | $                              | 191        |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 280 |   |
| Construction                          |       | —                         |       | — |   | — |   | 1,653 |   | — |   | 3,508 |   |
| Consumer:                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Home equity loans and lines of credit |       | 23                             |       | 24 |   | — |   | 21 |   | — |   | 350 |   |
| Automobile                            |       | —                         |       | — |   | — |   | 2 |   | — |   | — |   |
| Total                                 |       | $                              | 214        |   | $ | 24 |   | $ | — |   | $ | 1,676 |   | $ | — |   | $ | 4,138 |   |

 

***Analysis and Determination of the Allowance for Loan Losses*.**

***Historical Practice.***  Before 2003, we typically originated loanssecured by residential real estate.  Insuch periods, home equity loans and lines of credit were evaluated for loanlosses in the same manner as one-to four-family loans because they were allcollateralized by residential real estate. In 2003, then-current management determined to emphasize multi-familyand commercial real estate lending and construction lending, primarily in thesouthern New Jersey shore area where it had recently opened new branchoffices.  However, when doing so,management failed to adopt a risk rating system and update its allowance forloan losses policy to account for the new types of loans that were beingoriginated.  Consequently, managementfailed to properly review and classify the new types of loans that were beingoriginated.  Management’s failure to implementand apply the risk rating documentation and, thus, its failure to adequatelysupport its allowance for loan losses were deemed to be a material weakness inconnection with the audit of our 2004 financial statements.  Further, such weakness was cited by theregulators as one of the reasons leading to the issuance of the Cease andDesist Order in June 2005.

***Current Practice.***  In 2005, new management reviewed the existingpolicy on allowance for loan losses and updated it to ensure compliance withU.S. generally accepted accounting principles and with all regulatoryguidance.  Additionally, threeindependent loan consultants were engaged to separately review the loanportfolio and the classification of assets and to assist with establishingproper risk-weighting of loans.  Adescription of the revised procedures for determining the allowance for loanlosses is contained below.

The allowance forloan losses is maintained at a level representing management’s best estimate ofknown and inherent losses in the loan portfolio, based upon management’sevaluation of the portfolio’s collectibility. We evaluate the need to establishallowances against losses on loans on a quarterly basis. When changes in theallowance are necessary, an adjustment is made. The adjustments to the allowance are made by management and presented tothe Audit Committee of the Board of Directors.

Our methodologyfor assessing the appropriateness of the allowance for loan losses consists ofa specific allowance on identified problem loans and a general valuationallowance on the remainder of the loan portfolio. Although we determine theamount of each element of the allowance separately, the entire allowance forloan losses is available for the losses on entire portfolio.

                *SpecificAllowance Required for Identified Problem Loans.*  We establish an allowance on certainidentified problem loans, including all classified loans, based on such factorsas: (1) the strength of the customer’s personal or business cash flows andpersonal guarantees; (2) the availability of other sources of repayment; (3)the amount due or past due; (4) the type and value of collateral; (5) thestrength of our collateral position; (6) the estimated cost to sell thecollateral; and (7) the borrower’s effort to cure the delinquency.

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*General Valuation Allowance on theRemainder of the Loan Portfolio.*  We establish a general allowance for loansthat are not delinquent to recognize the inherent losses associated withlending activities. This general valuation allowance is determined bysegregating the loans by loan category and assigning percentages to eachcategory. The percentages are adjusted for significant factors that, inmanagement’s judgment, affect the collectibility of the portfolio as of theevaluation date. These significant factors may include changes in existinggeneral economic and business conditions affecting our lending areas and thenational economy, loss experience in particular segments of the portfolio,specific reserve and classified asset trends, delinquency trends and riskrating trends.  These loss factors aresubject to ongoing evaluation to ensure their relevance in the current economicenvironment.

As a result of oursystematic analysis of the allowance for loan losses, the loss factors wepresently use to determine the reserve level were updated in 2006 based onvarious risk factors such as delinquency trends and economic trends in ourmarket area and nationally.  As a resultof the increased loan-to-value ratios in the one- to four-family residentialreal estate loan and home equity loan portfolios and the value of real estatein our New Jersey and Philadelphia market areas, we increased the allowancepercentage on one- to four-family residential loans, commercial lines of creditand construction lines of credit.

We also identify loans that may need to be charged offas a loss by reviewing all delinquent loans, classified loans and other loansthat management may have concerns about collectibility.  For individually reviewed loans, the borrower’sinability to make payments under the terms of the loan or a shortfall incollateral value would result in our allocating a portion of the allowance tothe loan that was impaired.

AtDecember 31, 2006, our allowance for loan losses represented 0.82% oftotal loans and 91.4% of nonperforming loans. At December 31, 2006, the allowance for loan losses was $2.9million, all of which was a general valuation allowance for the loan portfolio.  The allowance for loan losses at December 31,2006 represents application of loan loss policies, which comply with U.S.generally accepted accounting principles and all regulatory guidance.  Additionally, the amount of the allowance forloan losses at December 31, 2006 reflects the separate review of the loanportfolio, the classification of assets and assistance with establishing properrisk-weighting of loans by independent loan review consultant during 2006.  The allowance for loan losses is impacted bya number of factors including the levels of non-performing loans, changingeconomic conditions in our market areas and the levels of loansoutstanding.  As these factors change,management will increase or decrease the allowance for loan losses as requiredto maintain adequate levels of reserves for losses inherent in its loan portfolio.

At December 31,2005, our allowance for loan losses represented 2.2% of total loans and 163.9%of nonperforming loans.  The allowancefor loan losses decreased $6.0 million to $8.3 million at December 31, 2005from $14.4 million at December 31, 2004 due to a credit to the provision forloan losses of $6.0 million.

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The followingtable sets forth the breakdown of the allowance for loan losses by loancategory at the dates indicated.  Theattribution in the table of all of the allowance for loan losses to one-tofour-family real estate loans before 2005 reflects former management’s:  (1) decision to evaluate loan losses for homeequity loans and lines of credit in the same manner as one-to four-family loansbecause they were all collateralized by residential real estate; and (2)failure to adopt a risk rating system and update its allowance for loan lossesanalysis to account for the increase in multi-family and commercial real estateand construction loans that were originated in 2003 and 2004.  See *“—Analysisand Determination of the Allowance for Loan Losses—Historical Practice.”*

 
| ** **                        | ** ** | **At December 31,**        | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|
| ** **                        | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                        | ** ** | **Amount**                           | ** ** | **% of  Loans in  Category  to Total  Loans** | ** ** | **Amount** | ** ** | **% of  Loans in  Category  to Total  Loans** | ** ** | **Amount** | ** ** | **% of  Loans in  Category  to Total  Loans** | ** ** | **Amount** | ** ** | **% of  Loans in  Category  to Total  Loans** | ** ** | **Amount** | ** ** | **% of  Loans in  Category  to Total  Loans** | ** ** |
| ** **                        | ** ** | **(Dollars in Thousands)** | ** ** |
| Real estate  loans:               |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One- to four-family               |       | $                                    | 798        |   | 58.3 | % | $ | 607 |   | 60.9 | % | $ | 14,391 |   | 50.1 | % | $ | 2,109 |   | 62.7 | % | $ | 2,082 |   | 84.3 | % |
| Multi-family and  commercial      |       | 784                                  |       | 11.6 |   | 2,544 |   | 8.8 |   | — |   | 17.2 |   | — |   | 13.7 |   | — |   | 3.9 |   |
| Construction                      |       | 318                                  |       | 3.2 |   | 4,640 |   | 8.3 |   | — |   | 18.5 |   | — |   | 11.2 |   | — |   | — |   |
| Consumer loans:                   |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Home equity loans                 |       | 257                                  |       | 20.5 |   | 316 |   | 17.3 |   | — |   | 9.9 |   | — |   | 8.6 |   | — |   | 8.4 |   |
| Automobile                        |       | 37                                   |       | 0.3 |   | 46 |   | 0.3 |   | — |   | 0.4 |   | — |   | 0.4 |   | — |   | 0.6 |   |
| Line of credit                    |       | 38                                   |       | 2.9 |   | — |   | 4.3 |   | — |   | 3.6 |   | — |   | 3.3 |   | — |   | 2.7 |   |
| Other                             |       | 3                                    |       | 0.1 |   | — |   | 0.1 |   | — |   | 0.3 |   | — |   | 0.1 |   | — |   | 0.1 |   |
| Commercial                        |       | 446                                  |       | 3.1 |   | 18 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Unallocated                       |       | 268                                  |       | — |   | 178 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                              |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total allowance  for  loan losses |       | $                                    | 2,949      |   | 100.0 | % | $ | 8,349 |   | 100.0 | % | $ | 14,391 |   | 100.0 | % | $ | 2,109 |   | 100.0 | % | $ | 2,082 |   | 100.0 | % |

 

 

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Although webelieve that we use the best information available to establish the allowancefor loan losses, future adjustments to the allowance for loan losses may benecessary and our results of operations could be adversely affected ifcircumstances differ substantially from the assumptions used in making thedeterminations. Furthermore, while we believe we have established our allowancefor loan losses in conformity with U.S. generally accepted accountingprinciples, there can be no assurance that the Office of Thrift Supervision, inreviewing our loan portfolio, will not request us to increase our allowance forloan losses.  The Office of ThriftSupervision may require us to increase our allowance for loan losses based onjudgments different from ours.  Inaddition, because future events affecting borrowers and collateral cannot bepredicted with certainty, there can be no assurance that increases will not benecessary should the quality of any loans deteriorate as a result of thefactors discussed above. Any material increase in the allowance for loan lossesmay adversely affect our financial condition and results of operations.

***Analysis of Loan Loss Experience.***  The following table sets forth an analysis ofthe allowance for loan losses for the periods indicated.

** **
| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                         | ** ** | **(Dollars in thousands)**       | ** ** |
|                                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Allowance at beginning  of period                                                  |       | $                                          | 8,349      |   | $ | 14,391 |   | $ | 2,109 |   | $ | 2,082 |   | $ | 975 |   |
| Charge-offs:                                                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| One- to four-family                                                                |       | —                                     |       | — |   | — |   | — |   | — |   |
| Consumer                                                                           |       | 8                                          |       | 17 |   | — |   | 3 |   | — |   |
| Total  charge-offs                                                                 |       | 8                                          |       | 17 |   | — |   | 3 |   | — |   |
|                                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Recoveries                                                                         |       | 2                                          |       | — |   | — |   | — |   | — |   |
| Net charge offs                                                                    |       | 6                                          |       | 17 |   | — |   | 3 |   | — |   |
| Provision (credit) for  loan losses                                                |       | (5,394                                     | )          | (6,025 | ) | 12,282 |   | 30 |   | 1,107 |   |
| Allowance at end  of period                                                        |       | $                                          | 2,949      |   | $ | 8,349 |   | $ | 14,391 |   | $ | 2,109 |   | $ | 2,082 |   |
|                                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Allowance for loan  losses to nonperforming loans and troubled debt restructurings |       | 91.44                                      | %          | 163.90 | % | 997.99 | % | 159.29 | % | 158.45 | % |
| Allowance for loan  losses to total loans at the end of the period                 |       | 0.82                                       |       | 2.22 |   | 2.89 |   | 0.50 |   | 0.50 |   |
| Net charge-offs (recoveries) to average loans outstanding during the  period       |       | —                                     |       | — |   | — |   | — |   | — |   |

 

***Interest Rate Risk Management.*** Wemanage the interest rate sensitivity of our interest-bearing liabilities andinterest-earning assets in an effort to minimize the adverse effects of changesin the interest rate environment. Deposit accounts typically react more quicklyto changes in market interest rates than mortgage loans because of the shortermaturities of deposits. As a result, sharp increases in interest rates mayadversely affect our earnings while decreases in interest rates maybeneficially affect our earnings. To reduce the potential volatility of ourearnings, we have sought to improve the match between asset and liabilitymaturities and rates, while maintaining an acceptable interest rate spread. Ourstrategy for managing interest rate risk involves: generally selling in thesecondary market longer-term fixed-rate one- to four-family residential realestate loans; emphasizing the origination of shorter-term adjustable-rateloans, which we maintain in our portfolio, and investing in securities withthat have adjustable-rates or shorter terms. We currently do not participate inhedging programs, interest rate swaps or other activities involving the use ofderivative financial instruments.

We have a Risk Management Committee, which togetherwith an Asset/Liability Management Committee, communicates, coordinates andcontrols all aspects involving asset/liability management. The committeeestablishes and monitors the volume, maturities, pricing and mix of assets andfunding sources with the objective of managing assets and funding sources toprovide results that are consistent with liquidity, growth, risk limits andprofitability goals.

Our goal is to manageasset and liability positions to moderate the effects of interest ratefluctuations on net interest income and net income.

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***Net Portfolio Value Analysis.*** We use anet portfolio value analyses prepared by the Office of Thrift Supervision andan internally prepared model to review our level of interest rate risk.  Such analyses measure interest rate risk bycomputing changes in net portfolio value of our cash flows from assets,liabilities and off-balance sheet items in the event of a range of assumed changesin market interest rates. Net portfolio value represents the market value ofportfolio equity and is equal to the market value of assets minus the marketvalue of liabilities, with adjustments made for off-balance sheet items. Theseanalyses assess the risk of loss in market risk-sensitive instruments in theevent of a sudden and sustained 100 to 300 basis point increase or 100 and 200basis point decrease in market interest rates with no effect given to any stepsthat we might take to counter the effect of that interest rate movement.Because of the low level of market interest rates, these analyses are notperformed for decreases of more than 200 basis points.  The internal model differs from that preparedby the Office of Thrift Supervision as it assumes:  (1) slower prepayments for fixed-rate one- tofour-family loans; and (2) a longer duration for transaction accounts.  Notwithstanding the different assumptions,the two models do not produce materially different results.

The followingtable, which is based on information that we provide to the Office of ThriftSupervision, presents the change in our net portfolio value at December 31,2006 that would occur in the event of an immediate change in interest ratesbased on Office of Thrift Supervision assumptions, with no effect given to anysteps that we might take to counteract that change.

 
| ** **                                                            | ** ** | **Net Portfolio Value**    | ** ** | **Net Portfolio Value as % of  Portfolio Value of Assets** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| **Basis Point (“bp”)  Change in Rates** | ** ** | **Amount**                           | ** ** | **Change**                                                                                         | ** ** | **% Change** | ** ** | **NPV Ratio** | ** ** | **Change (bp)** | ** ** |
| ** **                                                            | ** ** | **(Dollars in thousands)** | ** ** | ** **                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                  |       |                                 |       |                                                                                               |       |   |   |   |   |   |   |
| 300                                                                   |       | $                                    | 83,936     |                                                                                               | $          | (26,640 | ) | (24 | )% | 11.46 | % | (285 | ) |
| 200                                                                   |       | 94,313                               |       | (16,263                                                                                            | )          | (15 | ) | 12.64 |   | (168 | ) |
| 100                                                                   |       | 103,477                              |       | (7,100                                                                                             | )          | (6 | ) | 13.62 |   | (70 | ) |
| 0                                                                     |       | 110,577                              |       |                                                                                               |       |   |   | 14.32 |   |   |   |
| (100)                                                                 |       | 113,883                              |       | 3,306                                                                                              |       | 3 |   | 14.56 |   | 25 |   |
| (200)                                                                 |       | 113,420                              |       | 2,843                                                                                              |       | 3 |   | 14.39 |   | 7 |   |
|                                                                       |            |                                      |            |                                                                                                    |            |  |  |  |  |  |  |  |  |

 

The decrease inour net portfolio value shown in the preceding table that would occur upon anincrease in prevailing market interest rates reflects: (1) that a substantialportion of our loan portfolio is fixed-rate residential loans and (2) theshorter duration of deposits, which reprice more frequently in response tochanges in market interest rates.  Theincrease in our net portfolio value that would occur upon a decrease in marketrates of 100 basis points and the decrease in our net portfolio value thatwould occur upon a decrease in market rates of 200 basis points are due to ourfixed-rate residential mortgage portfolio increasing at a slower rate betweenthe 100 basis point and 200 basis point scenarios since such loans prepayfaster as market interest rates decline.

The Office ofThrift Supervision uses various assumptions in assessing interest rate risk.These assumptions relate to interest rates, loan prepayment rates, depositdecay rates and the market values of certain assets under differing interestrate scenarios, among others. As with any method of measuring interest raterisk, certain shortcomings are inherent in the methods of analyses presented inthe foregoing tables. For example, although certain assets and liabilities mayhave similar maturities or periods to repricing, they may react in differentdegrees to changes in market interest rates. Also, the interest rates oncertain types of assets and liabilities may fluctuate in advance of changes inmarket interest rates, while interest rates on other types may lag behindchanges in market rates. Additionally, certain assets, such as adjustable-ratemortgage loans, have features that restrict changes in interest rates on ashort-term basis and over the life of the asset. Further, in the event of achange in interest rates, expected rates of prepayments on loans and earlywithdrawals from certificates could deviate significantly from those assumed incalculating the table. Prepayment rates can have a significant impact oninterest income.  Because of the largepercentage of loans and mortgage-backed securities we hold, rising or fallinginterest rates have a significant impact on the prepayment speeds of ourearning assets that in turn affect the rate sensitivity position. When interestrates rise, prepayments tend to slow. When interest rates fall, prepaymentstend to rise. Our asset sensitivity would be reduced if prepayments slow andvice versa. While we believe these assumptions to be reasonable, there can be noassurance that assumed prepayment rates will approximate actual futuremortgage-backed security and loan repayment activity.

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***Liquidity Management*.**   Liquidity is the ability to meetcurrent and future financial obligations of a short-term nature. Our primarysources of funds consist of deposit inflows, loan repayments and maturities andsales of securities. While maturities and scheduled amortization of loans andsecurities are predictable sources of funds, deposit flows and loan prepaymentsare greatly influenced by general interest rates, economic conditions andcompetition.

We regularlyadjust our investments in liquid assets based upon our assessment of:  (1) expected loan demands; (2) expecteddeposit flows; (3) yields available on interest-earning deposits andsecurities; and (4) the objectives of our asset/liability managementpolicy.  We use a variety of measures toassess our liquidity needs, which are provided to our Asset/LiabilityManagement Committee on a regular basis. Our policy is to maintain net liquidity of at least 50% of our fundingobligations over the next month. Additionally, our policy is to maintain an amount of cash and short-termmarketable securities equal to at least 15% of net deposits and liabilitiesthat will mature in one year or less.

Our most liquid assets are cash and cash equivalents.The levels of these assets depend on our operating, financing, lending andinvesting activities during any given period. Cash and cash equivalents totaled$134.4 million at December 31, 2006. Securities classified asavailable-for-sale, which provide additional sources of liquidity, totaled$228.4 million at December 31, 2006.  Inaddition, at December 31, 2006, we had the ability to borrow a total ofapproximately $460.0 million from the Federal Home Loan Bank of Pittsburgh, ofwhich we had $30.0 million outstanding.

                At December 31, 2006, we had $69.4 million inloan commitments outstanding.  AtDecember 31, 2006, this consisted of $2.6 million of mortgage loancommitments, $25.2 million in home equity and consumer commitments and $41.5million in commercial commitments. Certificates of deposit due within one year of December 31, 2006 totaled$223.7 million.  This represented 54.5%of certificates of deposit at December 31, 2006.  We believe the large percentage ofcertificates of deposit that mature within one year reflects customers’hesitancy to invest their funds for long periods in the current low interestrate environment. If these maturing deposits do not remain with us, we will berequired to seek other sources of funds, including other certificates ofdeposit and borrowings. Depending on market conditions, we may be required topay higher rates on such deposits or other borrowings than we currently pay onthe certificates of deposit due on or before December 31, 2007. We believe,however, based on past experience, that a significant portion of ourcertificates of deposit will remain with us. We have the ability to attract andretain deposits by adjusting the interest rates offered.

The followingtable presents certain of our contractual obligations as of December 31, 2006.

** **
| ** **                       | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                                 | ** ** | **Less Than  One Year** | ** ** | **One to  Three Years** | ** ** | **Three to Five  Years** | ** ** | **More Than  Five Years** | ** ** |
| ** **                       | ** ** | **(Dollars in thousands)**      | ** ** |
|                             |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating lease  obligations (1) |       | $                                         | 158        |   | $ | 120 |   | $ | 38 |   | $ | — |   | $ | — |   |
| FHLB advances                    |       | 36,922                                    |       | 1,487 |   | 2,979 |   | 32,456 |   | — |   |
| Other long-term  obligations (2) |       | 4,995                                     |       | 1,754 |   | 3,238 |   | 3 |   | — |   |
| Total                            |       | $                                         | 42,075     |   | $ | 3,361 |   | $ | 6,255 |   | $ | 32,459 |   | $ | — |   |

----

1)              Represents leaseobligations for commercial loan production offices and equipment.

2)              Representsobligations to the Company’s third party data processing providers and othervendors.

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Our primaryinvesting activities are the origination and sale of loans and the purchase andsale of securities. Our primary financing activities consist of activity indeposit accounts and in 2006 the issuance of common stock. Deposit flows areaffected by the overall levels of interest rates, the interest rates andproducts offered by us and our local competitors and other factors. Wegenerally manage the pricing of our deposits to be competitive and to increasecore deposit relationships. Occasionally, we offer promotional rates on certaindeposit products to attract deposits.

The followingtable presents our primary investing and financing activities during theperiods indicated.

 

|                                                        | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| ** **                                             | ** ** | **(In thousands)**                    | ** ** |
| Investing  activities:                                 |       |                                       |       |   |   |
| Loan originations                                      |       | $                                          | (125,303   | ) | $ | (149,960 | ) |
| Other decreases in loans                               |       | 137,512                                    |       | 188,880 |   |
| Loan sales                                             |       | 4,000                                      |       | 83,784 |   |
| Security purchases                                     |       | (60,207                                    | )          | (109,868 | ) |
| Security sales                                         |       | 17,205                                     |       | 27,385 |   |
| Security maturities, calls and principal repayments    |       | 145,471                                    |       | 75,981 |   |
| Financing  activities:                                 |       |                                       |       |   |   |
| Decreases in deposits                                  |       | (85,773                                    | )          | (122,943) |   |
| Proceeds from  stock issuance, net of conversion costs |       | 62,348                                     |       | — |   |
|                                                        |            |                                            |            |  |  |  |  |

 

***Capital Management.***  We have managed our capital to maintainstrong protection for depositors and creditors. We are subject to variousregulatory capital requirements administered by the Office of ThriftSupervision, including a risk-based capital measure. The risk-based capitalguidelines include both a definition of capital and a framework for calculatingrisk-weighted assets by assigning balance sheet assets and off-balance sheetitems to broad risk categories. At December 31, 2006, we exceeded all of ourregulatory capital requirements.  We areconsidered “well capitalized” under regulatory guidelines.  See *“Regulationand Supervision—Regulation of Federal Savings Associations—CapitalRequirements,”*and*“—Regulatory Capital Compliance”*and the notes to the consolidated financial statements included in this Report.

We also willmanage our capital for maximum stockholder benefit. The capital from theoffering significantly increased our liquidity and capital resources. Overtime, the initial level of liquidity will be reduced as net proceeds from thestock offering are used for general corporate purposes, including the fundingof lending activities. Our financial condition and results of operations havebeen enhanced by the capital from the offering, resulting in increased netinterest-earning assets and net income. However, the large increase in equityresulting from the capital raised in the offering will, initially, have anadverse impact on our return on equity. In the future, we may use capitalmanagement tools such as cash dividends and common share repurchases. However,under Office of Thrift Supervision regulations, we will not be allowed torepurchase any shares during the first year following the offering, except tofund the restricted stock awards under the equity incentive plan, unlessextraordinary circumstances exist and we receive regulatory approval.

***Off-Balance Sheet Arrangements.***  In the normal course of operations, we engagein a variety of financial transactions that, in accordance with U.S. generallyaccepted accounting principles, are not recorded in our financial statements.These transactions involve, to varying degrees, elements of credit, interestrate and liquidity risk. Such transactions are used primarily to managecustomers’ requests for funding and take the form of loan commitments, lettersof credit and lines of credit. For information about our loan commitments andunused lines of credit, see note 10 of the notes to the consolidated financialstatements. We currently have no plans to engage in hedging activities in thefuture.

For the yearsended December 31, 2006 and 2005, we engaged in no off-balance sheet transactionsreasonably likely to have a material effect on our financial condition, resultsof operations or cash flows.

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**Impactof Recent Accounting Pronouncements**

On December 16,2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-BasedPayment,” which replaces SFAS No. 123, “Accounting for Stock-Based Compensation”and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”This statement will require that all share-based payments to employees,including grants of employee stock options, be recognized as compensation costsin the financial statements based on their fair values. The effective date ofthis statement for the Company was January 1, 2006. We adopted this standard asrequired, in accounting for the Long-Term Incentive Plan discussed in Note 9,which includes unvested shares.

In December 2004,the FASB issued SFAS No. 153, “Exchanges of Non-Monetary Assets, an amendmentof APB Opinion No. 29,” which eliminates the exception from fair valuemeasurement for non-monetary exchanges of similar productive assets andreplaces it with a general exception for exchanges of non-monetary assets thatdo not have commercial substance. The statement defines a non-monetary exchangewith commercial substance as one in which the future cash flows of an entityare expected to change significantly as a result of the exchange. SFAS No. 153is effective for fiscal years beginning after June 15, 2005. The Companyadopted this statement and there was no effect on its results of operations orfinancial position.

In May 2005, theFASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” whichestablishes, unless impracticable, retrospective application as the requiredmethod for reporting a change in accounting principle in the absence ofexplicit transition requirements specific to the newly adopted accountingprinciple. The statement provides guidance for determining whetherretrospective application of a change in accounting principle is impracticable.The statement also addresses the reporting of a correction of an error byrestating previously issued financial statements. SFAS No. 154 is effective foraccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. The Company adopted this statement and there was noeffect on its results of operations or financial position.

In March 2006, theFASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets, anamendment of SFAS No. 140.”  SFAS No. 156amends SFAS No. 140 with respect to the accounting for separately recognizedservicing assets and servicing liabilities by requiring an entity to recognizea servicing asset or liability each time it undertakes an obligation to servicea financial asset by entering into a servicing contract; requires allseparately recognized servicing assets and liabilities to be initially measuredat fair value, if practical; and permits an entity to choose either of thefollowing methods by which it will subsequently measure each class of separatelyrecognized servicing assets and liabilities:

1.               *Amortizationmethod* - Amortize the servicing assets or liabilities in proportionto and over the period of estimated net servicing income or loss and assessservicing assets and liabilities for impairment or increase obligation based onthe fair value at each reporting period.

2.               *Fairvalue measurement method*- Measure servicing assets or liabilitiesat fair value at each reporting date and report changes in fair value inearnings in the period in which the change occurs.

SFAS No.156 is effective for fiscal years beginning after September 15, 2006.  Earlier adoption is permitted as of thebeginning of an entity’s fiscal year, provided the entity has not yet issuedits financial statements, including interim financial statements, for anyperiod of that fiscal year.  Afteranalyzing the effects of the statement, the Company does not believe that theadoption of this statement will have a material impact on its results ofoperations or financial position.

In June 2006, FASB issued Financial Interpretation No.48 (FIN 48), Accounting for Uncertainty in Income Taxes — an interpretation ofSFAS Statement No. 109. FIN 48 provides guidance on financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. According to the Interpretation, a tax position is recognized ifit is more likely than not that the tax position will be sustained uponexamination, including resolution of any related appeals or litigation processes,based on the technical merits of the position. If the tax position meetsmore-likely-than-not recognition threshold, the position is measured todetermine the amount of benefit to recognize and should be measured at thelargest amount of benefit that is greater than 50% likely of being realizedupon ultimate settlement. FIN 48 also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure and transition. The provisions of FIN 48 are effective for fiscal 

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yearsbeginning after December 15, 2006.  TheCompany does not expect this interpretation to have a material impact on theCompany’s financial position and/or results of operations.

In September 2006, the Securities and ExchangeCommission (the “SEC’) Staff issued Staff Accounting Bulletin No. 108 (the“SAB”) addressing how the effects of prior-year uncorrected financial statementmisstatements should be considered in current-year financial statements. TheSAB requires registrants to quantify misstatements using both balance-sheet andincome-statement approaches and to evaluate whether either approach results inquantifying an error that is material in light of relative quantitative andqualitative factors. The SAB does not change the SEC staff’s previous guidancein SAB 99 on evaluating the materiality of misstatements.

SAB 108 addresses the mechanics of correctingmisstatements that include the effects from prior years. Additionally, SAB 108requires registrants to apply the new guidance for the first time that itidentifies material errors in existence at the beginning of the first fiscalyear ending after November 15, 2006 by correcting those errors through aone-time cumulative effect adjustment to beginning-of-year retained earnings.The Company adopted this statement and there was no effect on its results ofoperations or financial position.

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurement.  This statementdefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue measurements.  This statementapplies under other accounting pronouncements that require or permit fair valuemeasurements, the Board having previously concluded in those accountingpronouncements that fair value is the relevant measurement attribute.  Accordingly, this statement does not requireany new fair value measurements.

SFAS No. 157 is effective for fiscal years beginningafter November 15, 2007.  Earlier adoptionis encouraged, provided that the reporting entity has not yet issued financialstatements for that fiscal year, including financial statements for an interimperiod within that fiscal year.  TheCompany is evaluating this statement and has not yet determined the impact onits results of operations or financial position, if any.

In September 2006, the FASB issuedSFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans.”  This Statementimproves financial reporting by requiring an employer to recognize theoverfunded or underfunded status of a defined benefit postretirement plan as anasset or liability in its statement of financial position and to recognizechanges in that funded status in the year in which the changes occur throughcomprehensive income.  This Statementalso improves the financial reporting by requiring an employer to measure thefunded status of a plan as of the date of its year-end statement of financialposition, with limited exceptions.

Therequired date of adoption of the recognition and disclosure provisions of thisStatement for an employer that is an issuer of publicly traded equity, such asFox Chase Bancorp, Inc., is as of the end of the fiscal year ended afterDecember 15, 2006.  Retrospectiveapplication of this Statement is not permitted.   The Company adopted this statement in thelast quarter of 2006.

The FASB hasrecently approved the Emerging Issues Task Force (“EITF”) Issue No. 06-4 “Accountingfor Deferred Compensation and Postretirement Benefit Aspects of EndorsementSplit-Dollar Life Insurance Arrangements.” In this issue, the EITF concluded that an endorsement split dollar lifeinsurance policy does not effectively settle an employer’s obligation toprovide the post retirement benefit that the policy was designed toprovide.  Therefore, some current expenserecognition may need to be made for any endorsement split dollar plans withpost retirement benefits.

This guidanceapplies to all post retirement endorsement split dollar arrangements.  This will not impact split dollar plans thatonly provide pre-retirement death benefits.

The accrual for theliability would be calculated in one of two ways:

·                  theactuarial present value of the future death benefit or

·                  thecost of insurance of the policy during the postretirement period.

Compliance with this EITF must beapplied to fiscal years beginning after December 15, 2007 (January 1, 2008 forcalendar year entities).  It can be madethrough a cumulative—effect adjustment to retained earnings in the year ofadoption or as a 

57

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change in accounting principlesthrough retrospective application to all prior periods.  The Company has not determined if thisStatement will have a material impact on its consolidated financial statementsupon adoption.

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities—Including an Amendment of FASBStatement No. 115 (SFAS 159).” SFAS 159 permits entities to choose to measuremany financial instruments and certain other items at fair value and amendsSFAS 115 to, among other things, require certain disclosures for amounts forwhich the fair value option is applied. Additionally, this Statement provides that an entity may reclassifyheld-to-maturity and available-for-sale securities to the trading account whenthe fair value option is elected for such securities, without calling intoquestion the intent to hold other securities to maturity in the future.  This Statement is effective as of thebeginning of an entity’s first fiscal year that begins after November 15, 2007.Early adoption is permitted as of the beginning of a fiscal year that begins onor before November 15, 2007, provided the entity also elects to apply theprovisions of SFAS 157.  The Company hasnot completed its assessment of SFAS No. 159 and the impact, if any, on itsconsolidated financial statements.

At its September2006 meeting, the EITF reached a final consensus on Issue 06-05, “**Accounting for Purchasesof Life Insurance — Determining the Amount That Could be Realized in Accordancewith FASB Technical Bulletin No. 85-4***.*” Issue 06-05 concludes that indetermining the amount that could be realized under an insurance contractaccounted for under FASB Technical Bulletin No. 85-4, “**Accounting for Purchasesof Life Insurance***,*”the policyholder should (1) consider any additional amounts included in thecontractual terms of the policy; (2) assume the surrender value on aindividual-life by individual-life policy basis; and (3) notdiscount the cash surrender value component of the amount that could berealized when contractual restrictions on the ability to surrender a policyexist. Issue 06-05 should be adopted through either (1) a change inaccounting principle through a cumulative-effect adjustment to retainedearnings as of the beginning of the year of adoption or (2) a change inaccounting principle through retrospective application to all prior periods.Issue 06-05 is effective for fiscal years beginning after December 15,2006. The application of Issue 06-05 is not expected to have a materialeffect on the Company’s financial position or results of operations.

**Effect of Inflation and ChangingPrices**

The financialstatements and related financial data presented in this prospectus have beenprepared in accordance with U.S. generally accepted accounting principles,which require the measurement of financial position and operating results interms of historical dollars without considering the change in the relativepurchasing power of money over time due to inflation. The primary impact ofinflation on our operations is reflected in increased operating costs. Unlikemost industrial companies, virtually all the assets and liabilities of afinancial institution are monetary in nature. As a result, interest ratesgenerally have a more significant impact on a financial institution’sperformance than do general levels of inflation. Interest rates do notnecessarily move in the same direction or to the same extent as the prices ofgoods and services.

**ITEM 7A.               QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

The informationrequired by this item is incorporated herein by reference to Item 7,  “*Management’s Discussionand Analysis of Financial Condition and Results of Operation — Interest RateRisk Management*.”

**ITEM8.                  FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

Informationrequired by this item is included herein beginning on page F-1.

**ITEM 9.                  CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND**

**                                FINANCIAL DISCLOSURE**

There have been nochanges in or disagreements with accountants on accounting or financialdisclosure.  For information regardingFox Chase Bancorp’s change in accountants during fiscal 2005, the sectioncaptioned “*Proposal 3 — Ratification of Independent RegisteredPublic Accounting Firm”* in Fox Chase Bancorp’s Proxy Statement forthe 2007 Annual Meeting of Stockholders is incorporated by reference.

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**ITEM 9A.**                                            **CONTROLS AND PROCEDURES**

The Company’smanagement, including the Company’s principal executive officer and principalfinancial officer, have evaluated the effectiveness of the Company’s “disclosurecontrols and procedures,” as such term is defined in Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended (the “Exchange Act”).Based upon their evaluation, the principal executive officer and principalfinancial officer concluded that, as of the end of the period covered by thisreport, the Company’s disclosure controls and procedures were effective for thepurpose of ensuring that the information required to be disclosed in thereports that the Company files or submits under the Exchange Act with theSecurities and Exchange Commission (the “SEC”): (1) is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms, and (2) is accumulated and communicated to the Company’s management,including its principal executive and principal financial officers, asappropriate to allow timely decisions regarding required disclosure.

**ITEM 9B.               OTHER INFORMATION**

None.

# **PART III**

**ITEM 10.****                                              DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

**Directors**

For informationrelating to the directors of Fox Chase Bancorp, the section captioned *“Proposal 1 — Election of Directors”* in Fox Chase Bancorp’sProxy Statement for the 2007 Annual Meeting of Stockholders is incorporated byreference.

**ExecutiveOfficers**

For informationrelating to officers of Fox Chase Bancorp, see Part I, Item 1, *“Business — Executive Officers of the Registrant”*to this Annual Report on Form 10-K.

**Compliancewith Section 16(a) of the Exchange Act**

For informationregarding compliance with Section 16(a) of the Exchange Act, the cover page tothis Annual Report on Form 10-K and the section captioned *“Section16(a) Beneficial Ownership Compliance”* in Fox Chase Bancorp’s ProxyStatement for the 2007 Annual Meeting of Stockholders are incorporated byreference.

**Disclosureof Code of Ethics**

For informationconcerning Fox Chase Bancorp’s code of ethics, the information contained underthe section captioned *“Corporate Governance—Codeof Ethics and Business Conduct”* in Fox Chase Bancorp’s Proxy Statementfor the 2007 Annual Meeting of Stockholders is incorporated by reference.  A copy of the code of ethics and businessconduct is available to stockholders on the Governance Documents portion of theInvestors Relations section on Fox Chase Bancorp’s website atwww.foxchasebank.com.

**CorporateGovernance**

For informationregarding the audit committee and its composition and the audit committeefinancial expert, the section captioned *“Corporate Governance —Committees of the Board of Directors — Audit Committee”* in Fox ChaseBancorp’s Proxy Statement for the 2007 Annual Meeting of Stockholders isincorporated by reference.

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**ITEM 11.               EXECUTIVE COMPENSATION**

**ExecutiveCompensation**

For informationregarding executive compensation, the sections captioned *“CompensationDisclosure and Analysis,” “Executive Compensation”*and*“Director Compensation”* in Fox Chase Bancorp’s ProxyStatement for the 2007 Annual Meeting of Stockholders are incorporated byreference.

**CorporateGovernance**

For informationregarding the compensation committee report, the section captioned *“Compensation Committee Report”* in Fox Chase Bancorp’s ProxyStatement for the 2007 Annual Meeting of Stockholders is incorporated byreference.

**ITEM 12.****                                              SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERSMATTERS**

(a)                                  SecurityOwnership of Certain Beneficial Owners Information required by this item isincorporated herein by reference to the section captioned *“StockOwnership”* in Fox Chase Bancorp’s Proxy Statement for the 2007Annual Meeting of Stockholders.

(b)                                 SecurityOwnership of Management Information required by this item is incorporatedherein by reference to the section captioned *“StockOwnership”* in Fox Chase Bancorp’s Proxy Statement for the 2007Annual Meeting of Stockholders.

(c)                                  Changes in Control

Management of Fox Chase Bancorp knows of no arrangements, including anypledge by any person or securities of Fox Chase Bancorp, the operation of whichmay at a subsequent date result in a change in control of the registrant.

(d)                                 Equity CompensationPlan Information

Information required by this item isincorporated herein by reference to the section captioned *“Proposal 2—  Approval of the Fox Chase Bancorp,Inc. 2007 Equity Incentive Plan — Equity Compensation Plan Information”*in Fox Chase Bancorp’s Proxy Statement for the 2007 Annual Meeting ofStockholders.

**ITEM 13.****                                              CERTAINRELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE**

**CertainRelationships and Related Transactions**

For informationregarding certain relationships and related transactions, the section captioned*“Transactions with Management”* in FoxChase Bancorp’s Proxy Statement for the 2007 Annual Meeting of Stockholders isincorporated by reference.

**CorporateGovernance**

For informationregarding director independence, the section captioned *“Proposal 1 —Election of Directors”* in Fox Chase Bancorp’s Proxy Statement forthe 2007 Annual Meeting of Stockholders is incorporated by reference.

60

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**ITEM 14.****                                              PRINCIPALACCOUNTANT FEES AND SERVICES**

For informationregarding the principal accountant fees and expenses the section captioned *“Proposal 3 — Ratification of Independent Registered Public AccountingFirm”* in Fox Chase Bancorp’s Proxy Statement for the 2007 AnnualMeeting of Stockholders is incorporated by reference.

# **PART IV**

**ITEM 15.****                                              EXHIBITSAND FINANCIAL STATEMENT SCHEDULES**

(1)                                  Thefinancial statements required in response to this item are incorporated byreference from Item 8 of this Report.

(2)                                  Allfinancial statement schedules are omitted because they are not required orapplicable, or the required information is shown in the consolidated financialstatements or the notes thereto.

(3)                                  Exhibits
| No.        | ** ** | **Description**                                                                                        |
|------------|------------|--------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                             |
| 3.1        |       | Charter of Fox Chase Bancorp, Inc. (1)                                                                 |
| 3.2        |       | Bylaws of Fox Chase Bancorp, Inc. (1)                                                                  |
| 4.1        |       | Stock Certificate of Fox Chase Bancorp, Inc. (1)                                                       |
| 10.1       |       | *Form of Fox Chase Bank Employee Stock Ownership  Plan and Trust Agreement (1)                         |
| 10.2       |       | *Fox Chase Bank 401(k) Profit-Sharing Plan and Trust  (1)                                              |
| 10.3       |       | *Employment Agreement between Thomas M. Petro, Fox  Chase Bancorp, Inc. and Fox Chase Bank (2)         |
| 10.4       |       | *Employment Agreement between Jerry D. Holbrook, Fox  Chase Bancorp, Inc. and Fox Chase Bank (2)       |
| 10.5       |       | *Employment Agreement between Keiron G. Lynch, Fox  Chase Bancorp, Inc. and Fox Chase Bank (2)         |
| 10.6       |       | *Employment Agreement between David C. Kowalek, Fox  Chase Bancorp, Inc. and Fox Chase Bank (2)        |
| 10.7       |       | *Employment Agreement between James V. Schermerhorn,  Fox Chase Bancorp, Inc. and Fox Chase Bank (2)   |
| 10.8       |       | *Change of Control Agreement between Richard J.  Fuchs, Fox Chase Bancorp, Inc. and Fox Chase Bank (2) |
| 10.9       |       | *Fox Chase Bank Executive Long-Term Incentive Plan  (1)                                                |
| 10.10      |       | *Fox Chase Bank Employee Severance Compensation  Plan, as amended and restated (1)                     |
| 21.0       |       | List of Subsidiaries                                                                                   |
| 23.1       |       | Consent of KPMG LLP                                                                                    |
| 23.2       |       | Consent of Beard Miller Company LLP                                                                    |
| 31.1       |       | Rule 13a-14(a)/15d-14(a) Certification of Chief  Executive Officer                                     |
| 31.2       |       | Rule 13a-14(a)/15d-14(a) Certification of Chief  Financial Officer                                     |
| 32.0       |       | Section 1350 Certification of Chief Executive  Officer and Chief Financial                             |
|       |       | Officer                                                                                                |

----

*              Management contract orcompensatory plan, contract or arrangement.

(1)                                  Incorporatedby reference in this document to the exhibits to the Company’s RegistrationStatement on Form S-1 (File No. 333-134160), as amended, initially filed withthe Securities and Exchange Commission on May 16, 2006.

(2)                                  Incorporatedby reference in this document to the Company’s Quarterly Report on Form 10-Qfor the quarter ended September 30, 2006 (File No. 001-32971).

61

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**Index toConsolidated Financial Statements of Fox Chase Bancorp, Inc.**
|                                                                                                     | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|
| Report of  Independent Registered Accounting Firm                                                   | F-1        |
|                                                                                                |       |
| Report of  Independent Registered Accounting Firm                                                   | F-2        |
|                                                                                                |       |
| Consolidated  Statements of Condition as of December 31, 2006 and 2005                              | F-3        |
|                                                                                                |       |
| Consolidated  Statements of Operations for the Years Ended December 31, 2006, 2005 and 2004         | F-4        |
|                                                                                                |       |
| Consolidated  Statements of Changes in Equity for the Years Ended December 31, 2006, 2005 and  2004 | F-5        |
|                                                                                                |       |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004         | F-6        |
|                                                                                                |       |
| Notes to  Consolidated Financial Statements                                                         | F-7        |

 

*******

 

62

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***FOXCHASE BANCORP, INC.***

 

 

 

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

** **

TheBoard of Directors

Fox Chase Bancorp, Inc.:

We haveaudited the accompanying consolidated statements of condition of Fox ChaseBancorp, Inc. and subsidiary (the “Company”) as of December 31, 2006 and 2005,and the related consolidated statements of operations, changes in stockholders’equity, and cash flows for the years then ended.  These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Fox Chase Bancorp,Inc. and subsidiary as of December 31, 2006 and 2005, and the results of theiroperations and their cash flows for the years then ended, in conformity withU.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financialstatements, the Company adopted Statement of Financial Accounting Standards No.158, “Employers’ Accounting for Defined Benefit Pensions and OtherPost Retirement Plans,” effective December 31, 2006.
|  /s/ KPMG  LLP        |   |
|----------------------------|--------|
| Philadelphia, Pennsylvania |
| March 28, 2007             |

F-1

----

***FOXCHASE BANCORP, INC.***

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

To the Board of Directors

Fox Chase Bancorp, Inc.

Hatboro, Pennsylvania

 

Wehave audited the accompanying consolidated statements of operations, changes instockholders’ equity, and cash flows of Fox Chase Bancorp, Inc. and its wholly-ownedsubsidiary for the year ended December 31, 2004. These consolidatedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audit.

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement. TheCompany is not required to have, nor were we engaged to perform, an audit ofits internal control over financial reporting. Our audit included considerationof internal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion. An auditalso includes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements, assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion.

Inour opinion, the 2004 consolidated financial statements referred to abovepresent fairly, in all material respects, the results of operations and cashflows of Fox Chase Bancorp, Inc. and its wholly-owned subsidiary for the yearended December 31, 2004, in conformity with accounting principles generallyaccepted in the United States of America.

 
|                          | /s/ Beard Miller Company LLP |   |
|--------------------------|------------------------------|--------|
|                     |
|                     |
| Beard Miller Company LLP |
| Harrisburg, Pennsylvania |
| August 25, 2005          |

 

F-2

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***FOX CHASE BANCORP, INC.***CONSOLIDATED STATEMENTS OF CONDITION (IN THOUSANDS, EXCEPT SHARE DATA)

** **
| ** **                                                                                                                   | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                   | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                   | ** ** | ** **            | ** ** | ** ** | ** ** |
| ** **                                                                                                                   | ** ** | ** **            | ** ** | ** ** | ** ** |
| Cash and due  from banks                                                                                                     |       | $                     | 3,295      |   | $ | 3,761 |   |
| Interest-earning  demand deposits in other banks                                                                             |       | 131,146               |       | 42,325 |   |
| Total cash and  cash equivalents                                                                                             |       | 134,441               |       | 46,086 |   |
| Interest-earning  time deposits in other banks                                                                               |       | —                |       | 600 |   |
| Investment  securities available-for-sale                                                                                    |       | 70,112                |       | 141,783 |   |
| Mortgage related  securities available-for-sale                                                                              |       | 158,320               |       | 187,721 |   |
| Loans held for  sale                                                                                                         |       | 1,194                 |       | 357 |   |
| Loans, net of  allowance for loan losses of $2,949 at December 31,  2006 and $8,349 at December 31, 2005                     |       | 355,617               |       | 366,393 |   |
| Federal Home  Loan Bank stock, at cost                                                                                       |       | 4,422                 |       | 4,146 |   |
| Assets acquired  through foreclosure                                                                                         |       | —                |       | 107 |   |
| Bank-owned life  insurance                                                                                                   |       | 11,324                |       | 10,897 |   |
| Premises and  equipment                                                                                                      |       | 14,287                |       | 14,153 |   |
| Accrued interest  and dividends receivable                                                                                   |       | 3,397                 |       | 3,301 |   |
| Mortgage  servicing rights                                                                                                   |       | 1,177                 |       | 1,168 |   |
| Deferred tax  asset, net                                                                                                     |       | 1,087                 |       | 2,811 |   |
| Other assets                                                                                                                 |       | 1,607                 |       | 1,768 |   |
|                                                                                                                         |       |                  |       |   |   |
| **Total Assets**                                                                                                             |       | $                     | 756,985    |   | $ | 781,291 |   |
| ** **                                                                                                                   | ** ** | ** **            | ** ** | ** ** | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                               | ** ** | ** **            | ** ** | ** ** | ** ** |
| ** **                                                                                                                   | ** ** | ** **            | ** ** | ** ** | ** ** |
| **LIABILITIES**                                                                                                              | ** ** | ** **            | ** ** | ** ** | ** ** |
| Deposits                                                                                                                     |       | $                     | 596,534    |   | $ | 682,307 |   |
| Federal Home  Loan Bank advances                                                                                             |       | 30,000                |       | 30,000 |   |
| Advances from  borrowers for taxes and insurance                                                                             |       | 2,262                 |       | 2,503 |   |
| Accrued interest  payable                                                                                                    |       | 298                   |       | 268 |   |
| Accrued expenses  and other liabilities                                                                                      |       | 2,246                 |       | 2,692 |   |
|                                                                                                                         |       |                  |       |   |   |
| **Total  Liabilities**                                                                                                       |       | 631,340               |       | 717,770 |   |
|                                                                                                                         |       |                  |       |   |   |
| **STOCKHOLDERS’ EQUITY**                                                                                                |       |                  |       |   |   |
|                                                                                                                         |       |                  |       |   |   |
| Preferred stock  ($.01 par value; 1,000,000 shares authorized, none  issued and outstanding at December 31, 2006)            |       | —                |       | — |   |
| Common stock  ($.01 par value; 35,000,000 shares authorized,  14,679,750 shares issued and outstanding at December 31, 2006) |       | 147                   |       | — |   |
| Additional  paid-in capital                                                                                                  |       | 62,365                |       | — |   |
| Unearned common  stock held by employee stock ownership plan                                                                 |       | (5,371                | )          | — |   |
| Retained  earnings                                                                                                           |       | 69,545                |       | 65,911 |   |
| Accumulated  other comprehensive loss, net                                                                                   |       | (1,041                | )          | (2,390 | ) |
|                                                                                                                         |       |                  |       |   |   |
| **Total  Stockholders’ Equity**                                                                                         |       | 125,645               |       | 63,521 |   |
|                                                                                                                         |       |                  |       |   |   |
| **Total Liabilities and  Stockholders’ Equity**                                                                         |       | $                     | 756,985    |   | $ | 781,291 |   |
|                                                                                                                              |            |                       |            |  |  |  |  |  |  |  |  |  |  |

*The accompanying notes are an integral part of theseconsolidated financial statements.*

F-3

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***Fox Chase Bancorp, Inc.*******CONSOLIDATED STATEMENTS OF OPERATIONS (INTHOUSANDS, EXCEPT PER SHARE DATA)**

 
| ** **                                                        | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| **INTEREST INCOME**                                          | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest and fees on loans                                        |       | $                                           | 21,742     |   | $ | 25,722 |   | $ | 27,386 |   |
| Interest on mortgage related securities                           |       | 8,035                                       |       | 5,641 |   | 5,178 |   |
| Interest on investment securities  available-for-sale:            |       |                                        |       |   |   |   |   |
| Taxable                                                           |       | 3,523                                       |       | 3,061 |   | 3,093 |   |
| Nontaxable                                                        |       | 934                                         |       | 754 |   | 704 |   |
| Dividend income                                                   |       | 370                                         |       | 874 |   | 694 |   |
| Other interest income                                             |       | 2,573                                       |       | 1,549 |   | 511 |   |
| **Total Interest Income**                                         |       | 37,177                                      |       | 37,601 |   | 37,566 |   |
| **INTEREST  EXPENSE**                                             | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits                                                          |       | 18,974                                      |       | 19,212 |   | 18,204 |   |
| Federal Home Loan Bank advances                                   |       | 1,485                                       |       | 1,485 |   | 1,489 |   |
| **Total Interest Expense**                                        |       | 20,459                                      |       | 20,697 |   | 19,693 |   |
| **Net Interest Income**                                           |       | 16,718                                      |       | 16,904 |   | 17,873 |   |
| Provision (credit) for loan losses                                |       | (5,394                                      | )          | (6,025 | ) | 12,282 |   |
| **Net Interest Income after Provision (Credit) for  Loan Losses** |       | 22,112                                      |       | 22,929 |   | 5,591 |   |
| **NONINTEREST  INCOME**                                           | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service charges and other fee income                              |       | 1,037                                       |       | 775 |   | 937 |   |
| Net gain (loss) on sale of:                                       |       |                                        |       |   |   |   |   |
| Loans                                                             |       | 199                                         |       | 567 |   | 279 |   |
| Assets acquired through foreclosure                               |       | 85                                          |       | 6 |   | 24 |   |
| Fixed assets                                                      |       | (59                                         | )          | (161 | ) | (4 | ) |
| Securities                                                        |       | (17                                         | )          | (809 | ) | 169 |   |
| Income on bank-owned life insurance                               |       | 427                                         |       | 448 |   | 447 |   |
| Other                                                             |       | 401                                         |       | 388 |   | 427 |   |
| **Total Noninterest Income**                                      |       | 2,073                                       |       | 1,214 |   | 2,279 |   |
| **NONINTEREST  EXPENSE**                                          | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries, benefits and other compensation                         |       | 9,194                                       |       | 7,442 |   | 5,875 |   |
| Occupancy expense                                                 |       | 1,567                                       |       | 1,740 |   | 1,499 |   |
| Furniture and equipment expense                                   |       | 1,048                                       |       | 814 |   | 687 |   |
| Data processing costs                                             |       | 1,514                                       |       | 1,452 |   | 1,242 |   |
| Professional fees                                                 |       | 1,853                                       |       | 1,127 |   | 419 |   |
| Marketing expense                                                 |       | 621                                         |       | 373 |   | 407 |   |
| FDIC premiums                                                     |       | 796                                         |       | 765 |   | 115 |   |
| Contribution to charitable foundation                             |       | 1,500                                       |       | — |   | — |   |
| Other                                                             |       | 1,774                                       |       | 1,495 |   | 1,109 |   |
| **Total Noninterest Expense**                                     |       | 19,867                                      |       | 15,208 |   | 11,353 |   |
| **Income (Loss) Before Income Taxes**                             |       | 4,318                                       |       | 8,935 |   | (3,483 | ) |
| Income tax provision (benefit)                                    |       | 684                                         |       | 2,975 |   | (1,595 | ) |
| **Net Income (Loss)**                                             |       | $                                           | 3,634      |   | $ | 5,960 |   | $ | (1,888 | ) |
| Earnings per share (1):                                           |       |                                        |       |   |   |   |   |
| Basic                                                             |       | $                                           | 0.14       |   | — |   | — |   |
| Diluted                                                           |       | $                                           | 0.14       |   | — |   | — |   |

----

(1)*            *Due to the timingof the Bank’s reorganization into the mutual holding company form and thecompletion of the Company’s initial public offering on September 29, 2006,earnings per share information for the year ended December 31, 2006 is only forthe period September 29, 2006 through December 31, 2006.

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

F-4

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***FOX CHASEBANCORP, INC.***CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

**For the Years Ended December 31,2006, 2005 and 2004**
| ** **                                                                                                                                                                       | ** ** | ** ** | ** ** | ** **       | ** ** | **Unearned**        | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|---------------------|------------|--------------|------------|-------------------|------------|------------|------------|
| ** **                                                                                                                                                                       | ** ** | ** ** | ** ** | ** **       | ** ** | **Common**          | ** ** | ** **   | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                       | ** ** | ** ** | ** ** | **Additional**   | ** ** | **Stock held** | ** ** | ** **   | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                       | ** ** | **Common** | ** ** | **Paid in** | ** ** | **by**              | ** ** | **Retained** | ** ** | **Income/**       | ** ** | **Total**  | ** ** |
| ** **                                                                                                                                                                       | ** ** | **Stock**  | ** ** | **Capital**      | ** ** | **ESOP**            | ** ** | **Earnings** | ** ** | **(Loss)**        | ** ** | **Equity** | ** ** |
| **BALANCE - DECEMBER 31, 2003**                                                                                                                                                  |       | $          | —     |             | $          | —              |       | $            | —     |              | $          | 61,839     |       | $ | 492 |   | $ | 62,331 |   |
| Net loss                                                                                                                                                                         |       | —     |       | —           |       | —              |       | (1,888       | )          | —            |       | (1,888     | )          |
| Net change in  unrealized losses on securities available-for-sale, net of taxes                                                                                                  |       | —     |       | —           |       | —              |       | —       |       | (1,253            | )          | (1,253     | )          |
| **BALANCE - DECEMBER 31, 2004**                                                                                                                                                  | ** ** | **$**      | **—** | ** **       | **—** | ** **          | **—** |         | $          | 59,951            |       | (761       | )          | $ | 59,190 | ** ** |
| Net income                                                                                                                                                                       |       | —     |       | —           |       | —              |       | 5,960        |       | —            |       | 5,960      |       |
| Net change in  unrealized losses on securities available-for-sale, net of taxes                                                                                                  |       | —     |       | —           |       | —              |       | —       |       | (1,629            | )          | (1,629     | )          |
| **BALANCE - DECEMBER 31, 2005**                                                                                                                                                  |       | $          | —     |             | $          | —              |       | $            | —     |              | $          | 65,911     |       | $ | (2,390 | ) | $ | 63,521 |   |
| Sale of 6,395,835  shares of common stock in initial public offering, issuance of 8,148,915 to  the mutual holding company and issuance of 135,000 to the charitable  foundation |       | 147        |       | 62,201           |       | —              |       | —       |       | —            |       | 62,348     |       |
| Common stock acquired  by ESOP                                                                                                                                                   |       | —     |       | —           |       | (5,755              | )          | —       |       | —            |       | (5,755     | )          |
| Unallocated ESOP shares  committed to employees                                                                                                                                  |       | —     |       | 128              |       | 384                 |       | —       |       | —            |       | 512        |       |
| Shares allocated in long-term  incentive plan                                                                                                                                    |       | —     |       | 36               |       | —              |       | —       |       | —            |       | 36         |       |
| Adjustment to initially  apply SFAS  No. 158, net of tax                                                                                                                    |       | —     |       | —           |       | —              |       | —       |       | (98               | )          | (98        | )          |
| Net income                                                                                                                                                                       |       | —     |       | —           |       | —              |       | 3,634        |       | —            |       | 3,634      |       |
| Net change in  unrealized losses on securities available-for-sale, net of taxes                                                                                                  |       | —     |       | —           |       | —              |       | —       |       | 1,447             |       | 1,447      |       |
| **BALANCE - DECEMBER 31, 2006**                                                                                                                                                  |       | $          | 147        |             | $          | 62,365              |       | $            | (5,371     | )                 | $          | 69,545     |       | $ | (1,041 | ) | $ | 125,645 |   |

 

*The accompanying notes are anintegral part of these consolidated financial statements.*

F-5

----

***FOX CHASE BANCORP, INC.***CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
| ** **                                                                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES**                                                      | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss)                                                                             |       | $                                          | 3,634      |   | $ | 5,960 |   | $ | (1,888 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities:      |       |                                       |       |   |   |   |   |
| Provision  (credit) for loan losses                                                            |       | (5,394                                     | )          | (6,025 | ) | 12,282 |   |
| Depreciation                                                                                   |       | 1,229                                      |       | 1,193 |   | 1,046 |   |
| Net amortization  of securities premiums and discounts                                         |       | 809                                        |       | 1,895 |   | 2,032 |   |
| Provision for  deferred income taxes                                                           |       | 997                                        |       | 2,025 |   | (4,020 | ) |
| Shares committed  to be released to the ESOP                                                   |       | 512                                        |       | — |   | — |   |
| Shares earned in  the long-term incentive plan                                                 |       | 36                                         |       | — |   | — |   |
| Origination of  loans held for sale                                                            |       | (21,774                                    | )          | (357 | ) | — |   |
| Proceeds from  sale of loans held for sale                                                     |       | 20,914                                     |       | — |   | — |   |
| Net realized  losses (gains) on sales of assets acquired through foreclosure and fixed  assets |       | (26                                        | )          | 155 |   | (20 | ) |
| Net realized  gain on sales of mortgage related securities                                     |       | —                                     |       | (108 | ) | (28 | ) |
| Net loss (gain)  on sale and impairment of securities                                          |       | 17                                         |       | 917 |   | (141 | ) |
| Net gain on  sales of loans and loans held for sale                                            |       | (199                                       | )          | (567 | ) | (279 | ) |
| Earnings on  investment in bank-owned life insurance                                           |       | (427                                       | )          | (448 | ) | (447 | ) |
| Increase in  mortgage servicing rights                                                         |       | (9                                         | )          | (531 | ) | (418 | ) |
| (Increase)  decrease in accrued interest and dividends receivable and other assets             |       | 250                                        |       | (991 | ) | 1,828 |   |
| Increase  (decrease) in accrued interest payable, accrued expenses and other  liabilities      |       | (565                                       | )          | 3,555 |   | 1,328 |   |
| **Net  Cash Provided by Operating Activities**                                                 |       | 4                                          |       | 6,673 |   | 11,275 |   |
| ** **                                                                                     |       |                                       |       |   |   |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES**                                                      | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net maturities  of interest-earning time deposits in other banks                               |       | 600                                        |       | 2,574 |   | 1,218 |   |
| Investment  securities available for sale securities:                                          |       |                                       |       |   |   |   |   |
| Purchases                                                                                      |       | (28,418                                    | )          | (17,231 | ) | (67,946 | ) |
| Proceeds from  sales                                                                           |       | 17,205                                     |       | 17,409 |   | 14,778 |   |
| Proceeds from  maturities, calls and principal repayments                                      |       | 84,075                                     |       | 1,063 |   | 64,819 |   |
| Mortgage related  securities - AFS:                                                            |       |                                       |       |   |   |   |   |
| Purchases                                                                                      |       | (31,789                                    | )          | (92,637 | ) | (89,784 | ) |
| Proceeds from  sale                                                                            |       | —                                     |       | 9,976 |   | 2,658 |   |
| Proceeds from  maturities, calls and principal repayments                                      |       | 61,396                                     |       | 74,918 |   | 76,715 |   |
| Net (increase)  decrease in loans                                                              |       | 12,209                                     |       | 38,920 |   | (125,842 | ) |
| Proceeds from  sales of loans                                                                  |       | 4,000                                      |       | 83,784 |   | 45,671 |   |
| Net (increase)  decrease in Federal Home Loan Bank stock                                       |       | (276                                       | )          | 1,355 |   | (559 | ) |
| Purchases of  premises and equipment                                                           |       | (1,422                                     | )          | (904 | ) | (2,605 | ) |
| Proceeds from  sales of assets acquired through foreclosure                                    |       | 192                                        |       | — |   | 107 |   |
| **Net  Cash Provided (Used) by Investing Activities**                                          |       | 117,772                                    |       | 119,227 |   | (80,770 | ) |
| ** **                                                                                     |       |                                       |       |   |   |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES**                                                      | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net increase  (decrease) in deposits                                                           |       | (85,773                                    | )          | (122,943 | ) | 81,412 |   |
| Decrease in  advances from borrowers for taxes and insurance                                   |       | (241                                       | )          | (593 | ) | (217 | ) |
| Proceeds from  stock issuance, net of conversion costs                                         |       | 62,348                                     |       | — |   | — |   |
| Acquisition of  stock acquired for ESOP plan                                                   |       | (5,755                                     | )          | — |   | — |   |
| **Net  Cash (Used) Provided by Financing Activities**                                          |       | (29,421                                    | )          | (123,536 | ) | 81,195 |   |
| ** **                                                                                     | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  Increase in Cash and Cash Equivalents**                                                 |       | 88,355                                     |       | 2,364 |   | 11,700 |   |
| ** **                                                                                     | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **CASH AND CASH EQUIVALENTS —  BEGINNING**                                                |       | 46,086                                     |       | 43,722 |   | 32,022 |   |
|                                                                                           |       |                                       |       |   |   |   |   |
| **CASH AND CASH EQUIVALENTS —  ENDING**                                                   |       | $                                          | 134,441    |   | $ | 46,086 |   | $ | 43,722 |   |
| **SUPPLEMENTAL DISCLOSURE OF CASH  FLOW INFORMATION**                                          |       |                                       |       |   |   |   |   |
| Interest paid                                                                                  |       | $                                          | 20,363     |   | $ | 20,737 |   | $ | 19,617 |   |
| Income taxes  paid                                                                             |       | $                                          | 487        |   | $ | 1,441 |   | $ | 1,242 |   |
| Transfers of loans to  assets acquired through foreclosure                                     |       | $                                          | —     |   | $ | 107 |   | — |   |

 

*The accompanying notes are anintegral part of these consolidated financial statements.*

 

F-6

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***FOX CHASEBANCORP, INC.***

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**Business**

FoxChase Bancorp, Inc. (the “Company”) was organized on September 29, 2006 underthe laws of the United States for the purpose of being a holding company forFox Chase Bank (the “Bank”), a stock savings bank also organized under the lawsof the United States.  On September 29,2006, the Company completed its initial public offering in which it sold6,395,835 shares, or 43.57%, of its outstanding common stock to the public,including 575,446 shares purchased by the Fox Chase Bank Employee StockOwnership Plan (the “ESOP”).  Anadditional 8,148,915 shares, or 55.51% of the Company’s outstanding stock, wereissued to Fox Chase MHC, the Company’s federally chartered holding company. Netproceeds of the offering totaled $56.6 million. Additionally, the Company contributed $150,000 in cash and issued135,000 shares, or 0.92% of its outstanding common stock, to the Fox Chase BankCharitable Foundation.

TheCompany’s primary business has been that of holding the common stock of theBank and a loan to the ESOP.   Fox ChaseBancorp, Inc. is authorized to pursue other business activities permissible bylaws and regulations for other savings and loan holding companies.

TheCompany provides a wide variety of financial products and services toindividuals and businesses through its eleven branches in Philadelphia,Richboro, Willow Grove, Warminster, Lahaska, Hatboro, Media and Exton,Pennsylvania, and Ocean City, Marmora and Egg Harbor Township, New Jersey.  The operations of the Company are managed asa single business segment.  The Companycompetes with other financial institutions and other companies that providefinancial services.

TheCompany and Bank are subject to regulations of certain federal bankingagencies.  These regulations can and dochange significantly from period to period. The Company and Bank also undergo periodic examinations by regulatoryagencies which may subject it to further changes with respect to assetvaluations, amounts of required loss allowances and operating restrictionsresulting from the regulators’ judgments based on information available to themat the time of their examinations.

**Principlesof Consolidation and Presentation**

Theconsolidated financial statements include the accounts of the Company and itswholly owned subsidiary, the Bank (collectively referred to as the “Company”).The Bank’s operations include the accounts of its wholly owned subsidiary, FoxChase Financial, Inc.  Fox ChaseFinancial, Inc. is a Delaware chartered investment holding company and its solepurpose is to manage and hold investment securities.  The consolidated financial statements includethe Company beginning on September 29, 2006. The consolidated financial statements and related notes include only theactivity and balances of the Bank and its subsidiary through September 29,2006.  The financial statements do notinclude the transactions and balances of Fox Chase MHC.  All material inter-company transactions andbalances have been eliminated in consolidation. Prior period amounts arereclassified, when necessary, to conform with the current year’s presentation.

TheCompany follows accounting principles and reporting practices which are incompliance with U.S. generally accepted accounting principles (“GAAP”). Thepreparation of the financial statements in conformity with GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from those estimates.  Material estimates that are particularly

F-7

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susceptibleto significant change in the near term relate to the determination of theallowance for loan losses, the valuation and losses, the valuation andrealizability of deferred tax assets, the evaluation of mortgage servicingrights and the evaluation of other than temporary impairment of investments.

**Risk andUncertainties**

In thenormal course of its business, the Company encounters two significant types ofrisk: economic and regulatory.  There arethree main components of economic risk: interest rate risk, credit risk andmarket risk.  The Company is subject tointerest rate risk to the degree that its interest-bearing liabilities matureor reprice at different speeds, or on a different basis from itsinterest-earning assets.  The Company’sprimary credit risk is the risk of defaults in the Company’s loan portfoliothat result from borrowers inability or unwillingness to make contractuallyrequired payments.  The Company’s lendingactivities are concentrated in Southeastern Pennsylvania and Southern NewJersey.  The ability of the Company’sborrowers to repay amounts owed is dependent on several factors, including theeconomic conditions in the borrowers’ geographic regions and the borrowers’financial conditions.   Market riskreflects changes in the value of the collateral underlying loans, the valuationof real estate held by the Company, and the valuation of loans held for sale,securities, mortgage servicing assets and other investments.

**Cash andCash Equivalents**

Forpurposes of reporting cash flows, cash and cash equivalents include cash anddue from banks and interest-earning demand deposits in other banks.   At times, such balances exceed the FDIClimits.

**Interest-EarningTime Deposits in Other Banks**

TheCompany maintains interest-earning time deposits at various financialinstitutions generally having maturities greater than 90 days.  At times, such balances exceed the FDIClimits.  Management periodically assessesthe financial condition of these institutions and believes the potential creditrisk is minimal.

**InvestmentSecurities**

TheCompany accounts for their investment securities in accordance with SFAS No.115, “Accounting for Certain Investments in Debt and Equity Securities.”  This standard requires, among other things,that debt and equity securities are classified into three categories andaccounted for as follows:

·                  Debt securities with the positiveintention to hold to maturity are classified as “held-to-maturity” and reportedat amortized cost.

·                  Debt and equity securities purchasedwith the intention of selling them in the near future are classified as “tradingsecurities” and are reported at fair value, with unrealized gains and lossesincluded in earnings.

·                  Debt and equity securities notclassified in either of the above categories are classified as “available-for-salesecurities” and reported at fair value, with unrealized gains and lossesexcluded from earnings and reported, net of tax, as increases or decreases inother comprehensive income, a separate component of stockholders’ equity.  Securities classified as available-for-saleare those securities that the Company intends to hold for an indefinite periodof time but not necessarily to maturity. Any decision to sell a security classified as

F-8

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available-for-sale would be based on various factors,including significant movement in interest rates, changes in maturity mix ofthe Company’s assets and liabilities, liquidity needs, regulatory capitalconsiderations and other similar factors.

Managementdetermines the appropriate classification of debt securities at the time ofpurchase and re-evaluates such designation as of each balance sheet date.

Purchasepremiums and discounts are recognized in interest income using the interestmethod over the terms of the securities. Declines in the fair value of available-for-sale securities below theircost that are deemed to be other than temporary are reflected in earnings asrealized losses.  In estimatingother-than-temporary impairment losses, management considers (1) the length oftime and the extent to which the fair value has been less than cost, (2) thefinancial condition and near-term prospects of the issuer and (3) the intentand ability of the Company to retain its investment in the issuer for a periodof time sufficient to allow for any anticipated recovery in fair value.  Gains and losses on the sale of securitiesare recorded on the trade date and are determined using the specificidentification method.

Becauseof the volatility of the financial markets in which securities are traded,there is the risk that any future fair value could be significantly less thanthat recorded or disclosed in the accompanying financial statements.   Federal law requires a member institution ofthe Federal Home Loan Bank System to hold stock of its district Federal HomeLoan Bank according to a predetermined formula. This stock is carried at cost.

**LoansHeld for Sale**

TheCompany originates mortgage loans held for investment and held for sale.  At origination, the mortgage loan isidentified as either held for sale or for investment.  Mortgage loans originated and intended forsale in the secondary market are carried at the lower of aggregate cost orestimated fair value.  Net unrealizedlosses are recognized by charges to operations. Cash receipts and cash payments resulting from acquisitions and sales ofloans are classified as operating cash flows if those loans are acquiredspecifically for resale and are carried at fair value or the lower of cost orfair value. Cash receipts resulting from sales of loans that were notspecifically acquired for resale are classified as investing cash inflowsregardless of a change in the purpose for holding those loans.

**Mortgage Servicing Rights**

Upon thesale of a residential mortgage loan where the Company retains servicing rights,a mortgage servicing right is recorded. Existing GAAP applicable to the periodspresented herein requires that mortgage servicing rights on these loans beamortized into income over the estimated life of the loans sold using the interestmethod.  Such assets are subject to adisaggregated impairment test at the end of each reporting period, based on thepredominant risk characteristics of the underlying loans.

**Loans,Loan Origination Fees and Uncollected Interest**

Loansare recorded at cost, net of unearned discounts, deferred fees andallowances.  Discounts or premiums onpurchased loans are amortized using the interest method over the remainingcontractual life of the portfolio, adjusted for actual prepayments.  Loan origination fees and certain directorigination costs are deferred and amortized using the interest method over thecontractual life as an

F-9

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adjustmentto yield on the loans.  Interest incomeis accrued on the unpaid principal balance. From time-to-time, the Company sells certain loans for liquiditypurposes or to manage interest rate risk.

Theaccrual of interest is generally discontinued when the contractual payment ofprincipal or interest has become 90 days past due or management has seriousdoubts about further collectibility of principal or interest, even though theloan is currently performing.  A loan mayremain on accrual status if it is in the process of collection and is eitherguaranteed or well secured.  When a loanis placed on nonaccrual status, unpaid interest income is reversed.  Interest received on nonaccrual loansgenerally is either applied against principal or reported as interest income,according to management’s judgment as to the ultimate collectibility ofprincipal.  Generally, loans are restoredto accrual status when the obligation is brought current, has performed inaccordance with the contractual terms for a reasonable period of time and theultimate collectibility of the total contractual principal and interest is nolonger in doubt.

**Allowancefor Loan Losses**

Theallowance for loan losses is established through provisions for loan lossescharged against income.  Loans deemed tobe uncollectible are charged against the allowance for loan losses, andsubsequent recoveries, if any, are credited to the allowance.

Theallowance for loan losses is maintained at a level representing management’sbest estimate of known and inherent losses in the portfolio, based uponmanagement’s evaluation of the portfolio’s collectibility.  Management’s evaluation is based upon ananalysis of the loan portfolio, past loss experience, current economicconditions and other relevant factors. While management uses the best information available to make itsevaluations, such evaluations are highly subjective, and future adjustments tothe allowance may be necessary if conditions differ substantially from theassumptions used in making the evaluations. In addition, various regulatory agencies periodically review the Company’sallowance for loan losses.  Such agenciesmay require the Company to recognize additions to the allowance, based on theirjudgments at the time of their examination.

Loansare deemed impaired when, based on current information and events, it isprobable that the Company will be unable to collect all proceeds due accordingto the contractual terms of the loan agreement. Factors considered by management in determining impairment includepayment status, collateral value and the probability of collecting scheduled principaland interest payments when due.  Forpurposes of applying measurement criteria for impaired loans, the Companyexcludes large groups of smaller homogenous loans, primarily consisting ofresidential real estate and consumer loans, as well as commercial loans withbalances of less than $100,000.

Impairmentis measured on a loan by loan basis for commercial loans by either the presentvalue of expected future cash flows discounted at the loan’s effective interestrate, the loan’s obtainable market price or the fair value of the collateral ifthe loan is collateral dependent.

**AssetsAcquired Through Foreclosure**

Realestate and other repossessed collateral acquired through a foreclosure or by adeed-in-lieu of foreclosure are classified as assets acquired throughforeclosure.  Assets acquired throughforeclosure are carried at the lower of cost or fair value, net of estimatedselling costs.  Costs related to thedevelopment or improvement of a foreclosed property are capitalized; holdingcosts are charged to expense as incurred.

F-10

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**Bank-Owned Life Insurance**

TheCompany has invested in bank owned life insurance (“BOLI”).  BOLI involves the purchasing of lifeinsurance by the Company on a chosen group of employees and directors.  The Company is the owner and beneficiary ofthe policies.  This life insuranceinvestment is carried at the cash surrender value of the underlyingpolicies.  Income from the increase incash surrender value of the policies is included in other income in theconsolidated statements of operations.

**Premisesand Equipment**

Premisesand equipment are carried at cost less accumulated depreciation.  Depreciation is computed on the straight-linemethod over the assets’ estimated useful lives (generally 10-39 years forbuildings and 3-7 years for furniture and equipment).   When assets are retired, or otherwisedisposed of, the cost and related accumulated depreciation are removed from theaccounts.  The cost of maintenance andrepairs is charged to expense when incurred and renewals and betterments arecapitalized.  Leasehold improvements aredepreciated using the straight-line method over the shorter of the useful lifeof the improvement or the remaining life of the lease.

**Transfersof Financial Assets**

Transfersof financial assets are accounted for as sales, when control over the assetshas been surrendered.  Control overtransferred assets is deemed to be surrendered when (1) the assets have beenisolated from the Company, (2) the transferee obtains the right (free ofconditions that constrain it from taking advantage of that right) to pledge orexchange the transferred assets and (3) the Company does not maintain effectivecontrol over the transferred assets through an agreement to repurchase thembefore maturity.

**IncomeTaxes**

TheCompany accounts for income taxes under the asset/liability method.  Deferred tax assets are recognized fordeductible temporary differences and deferred tax liabilities are recognizedfor taxable temporary differences. Temporary differences are the differences between the reported amountsof assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in theopinion of management, it is more likely than not that some portion of thedeferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects ofchanges in tax laws and rates on the date of enactment.  The Company and its subsidiaries file aconsolidated federal income tax return and individual state and local incometax returns.

**Marketingand Advertising**

TheCompany expenses marketing and advertising costs as incurred.

**Off-BalanceSheet Financial Instruments**

Inthe ordinary course of business, the Company has entered into off-balance sheetfinancial instruments consisting of commitments to extend credit.  Such financial instruments are recorded inthe balance sheet when they are funded. The Company uses the same credit policies in making commitments andconditional obligations as it does for on-balance sheet instruments.

F-11

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**Pension Plan**

**SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans,” became effective as of December 31,2006, and requires recognition of an asset or liability in the statement ofcondition reflecting the funded status of the Pension Plan with current yearchanges in the funded status recognized in accumulated other comprehensiveincome (loss), net.  SFAS No. 158 did notchange the existing criteria for measurement of periodic benefit costs, planassets or benefit obligations.**

Thefollowing table summarizes the incremental effects of the initial adoption ofSFAS No. 158 on our Statement of Condition at December 31, 2006 (dollars inthousands).
|                                                  | ** ** | **Before**                 | ** ** | ** **                 | ** ** | **After**                    | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|------------------------------|------------|
| ** **                                       | ** ** | **Application of**    | ** ** | **SFAS No. 158** | ** ** | **Application**              | ** ** |
| ** **                                       | ** ** | **SFAS No. 158** | ** ** | **Adjustments**            | ** ** | **of SFAS No.158** | ** ** |
| Other assets                                     |       | $                          | 1,668      |                       | $          | (61                          | )          | $ | 1,607 |   |
| Total assets                                     |       | 756,996                    |       | (11                        | )          | 756,985                      |       |
| Deferred tax  asset                              |       | 1,037                      |       | 50                         |       | 1,087                        |       |
| Accrued expenses  and other liabilities          |       | 2,159                      |       | 87                         |       | 2,246                        |       |
| Total  liabilities                               |       | 631,253                    |       | 87                         |       | 631,340                      |       |
| Accumulated  other comprehensive loss            |       | (943                       | )          | (98                        | )          | (1,041                       | )          |
| Total  stockholders’ equity                 |       | 125,743                    |       | (98                        | )          | 125,645                      |       |
| Total liabilities and  stockholders’ equity |       | 756,996                    |       | (11                        | )          | 756,985                      |       |
|                                                  |            |                            |            |                            |            |                              |            |  |  |  |

 

See Note 9 for further details on the Bank’s pension plan.

**EmployeeStock Ownership Plan**

Theemployee stock ownership plan (“ESOP”) is accounted for in accordance with theprovisions of Statement of Position No. 93-6, “Employer Accounting for EmployeeStock Ownership Plans.”  The fundsborrowed by the ESOP from the Company to purchase the Company’s common stockare being repaid from the Bank’s contributions over a period of 15 years.  The Company’s common stock not yet allocatedto participants is recorded as a reduction of stockholder’s equity atcost.  The Company’s loan to the ESOP andthe ESOP’s note payable are not reflected in the consolidated statement ofcondition.

Compensationexpense for the ESOP is based on the market price of the Company’s stock and isrecognized as shares are committed to be released to participants. The notereceivable and related interest income are included in the parent companyfinancial statements presented in Note 18.

**Per ShareInformation**

TheCompany follows the provisions of SFAS No. 128, “Earnings Per Share.”  Basic earnings per share exclude dilution andis computed by dividing income available to common stockholders by theweighted-average common shares outstanding during the period.  Diluted earnings per share takes into accountthe potential dilution that could occur if securities or other contracts toissue common stock were exercised and converted into common stock.  Earnings per share were not calculated in

F-12

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2004 and2005 since the Company did not complete its initial public offering untilSeptember 29, 2006.

Earningsper share (“EPS”), basic and diluted, were $0.14 for the year ended December31, 2006.  Due to timing of the Bank’sreorganization into a mutual holding company form and the completion of theCompany’s initial public offering on September 29, 2006, earnings per shareinformation for the year ended December 31, 2006 is only for the period fromSeptember 29, 2006 through December 31, 2006.

Thefollowing table presents the reconciliation of the numerators and denominatorsof the basic and diluted EPS computations.
|                                                                              | ** ** | **Year Ended**   | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **December 31,** | ** ** |
| ** **                                                                   | ** ** | **2006**              | ** ** |
| Net income for  the period from September 29, 2006 to December 31, 2006      |       | $                     | 2,015,000  |   |
|                                                                         |       |                  |       |
| Weighted-average  common shares outstanding                                  |       | 14,679,750            |       |
| Average common  stock acquired by stock benefit plans:                       |       |                  |       |
| Unvested shares  — long-term incentive plan                             |       | (36,381               | )          |
| ESOP shares unallocated, net                                                 |       | (562,522              | )          |
|                                                                         |       |                  |       |
| Weighted-average  common shares used to calculate basic earnings per share   |       | 14,080,847            |       |
|                                                                         |       |                  |       |
| Dilutive effect  of shares in long-term incentive plan                       |       | 36,381                |       |
|                                                                         |       |                  |       |
| Weighted-average  common shares used to calculate diluted earnings per share |       | 14,117,228            |       |
|                                                                         |       |                  |       |
| Earnings per  share-basic                                                    |       | $                     | 0.14       |   |
| Earnings per  share-diluted                                                  |       | $                     | 0.14       |   |

 

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**NOTE 2 — ADJUSTMENTS OF ACCOUNTING ERRORS**

During2006, management identified and corrected certain accounting errors thatoccurred in prior years.  Managementevaluated the quantitative and qualitative impact of the corrections,individually and in the aggregate, on previously reported periods, the currentyears results of operations and on earnings trends.  Based upon this evaluation, managementconcluded that such errors are not material to the Company’s consolidatedfinancial statements taken as a whole. The adjustments, amounting to $313,000 ($207,000 after tax), increasedexpenses by $337,000 and increased other income by $24,000 in 2006.  Additionally, the Company reduced its taxcontingency reserve and expense by $105,000 in 2006 after reevaluating theCompany’s tax position.

**NOTE 3 - INVESTMENT AND MORTGAGE RELATED SECURITIES**

Theamortized cost and fair value of securities available-for-sale as ofDecember 31, 2006 and 2005 are summarized as follows:
| ** **                               | ** ** | **December 31, 2006** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **Amortized  Cost**             | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
| ** **                               | ** ** | **(In Thousands)**         | ** ** |
| Obligations of U.S.  government agencies |       | $                               | 42,344     |   | $ | 4 |   | $ | (470 | ) | $ | 41,878 |   |
| State and political  subdivisions        |       | 24,126                          |       | 141 |   | (48 | ) | 24,219 |   |
| Corporate debt  securities               |       | 4,017                           |       | — |   | (2 | ) | 4,015 |   |
|                                     |       | 70,487                          |       | 145 |   | (520 | ) | 70,112 |   |
|                                     |       |                            |       |   |   |   |   |   |   |
| Mortgage related  securities             |       | 159,369                         |       | 299 |   | (1,348 | ) | 158,320 |   |
|                                     |       |                            |       |   |   |   |   |   |   |
| **Total securities**                     |       | $                               | 229,856    |   | $ | 444 |   | $ | (1,868 | ) | $ | 228,432 |   |

 

 
| ** **                               | ** ** | **December 31, 2005** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **Amortized  Cost**             | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
| ** **                               | ** ** | **(In Thousands)**         | ** ** |
| Obligations of U.S.  government agencies |       | $                               | 99,602     |   | $ | 30 |   | $ | (1,324 | ) | $ | 98,308 |   |
| State and political  subdivisions        |       | 18,863                          |       | 116 |   | (171 | ) | 18,808 |   |
| Corporate debt  securities               |       | 7,926                           |       | — |   | (323 | ) | 7,603 |   |
| Mutual funds                             |       | 17,064                          |       | — |   | — |   | 17,064 |   |
|                                     |       | 143,455                         |       | 146 |   | (1,818 | ) | 141,783 |   |
|                                     |       |                            |       |   |   |   |   |   |   |
| Mortgage related  securities             |       | 189,698                         |       | 311 |   | (2,288 | ) | 187,721 |   |
|                                     |       |                            |       |   |   |   |   |   |   |
| **Total securities**                     |       | $                               | 333,153    |   | $ | 457 |   | $ | (4,106 | ) | $ | 329,504 |   |

 

F-14

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The following tables show gross unrealized losses and fair value ofsecurities, aggregated by security category and length of time that individualsecurities have been in a continuous unrealized loss position, atDecember 31, 2006 and 2005:
| ** **                               | ** ** | **December 31, 2006**        | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **Less than 12 Months** | ** ** | **12 Months or More** | ** ** | **Total** | ** ** |
| ** **                               | ** ** | **Fair  Value**                        | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| ** **                               | ** ** | **(In Thousands)**                | ** ** |
| Obligations of U.S.  government agencies |       | $                                      | 9,265      |   | $ | (19 | ) | $ | 29,614 |   | $ | (451 | ) | $ | 38,879 |   | $ | (470 | ) |
| State and political subdivisions         |       | 2,632                                  |       | (8 | ) | 2,708 |   | (40 | ) | 5,340 |   | (48 | ) |
| Corporate debt  securities               |       | —                                 |       | — |   | 4,015 |   | (2 | ) | 4,015 |   | (2 | ) |
| Mortgage related  securities             |       | 52,588                                 |       | (249 | ) | 69,023 |   | (1,099 | ) | 121,611 |   | (1,348 | ) |
|                                     |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| **Total securities**                     | ** ** | **$**                                  | **64,485** | ** ** | **$** | **(276** | **)** | **$** | **105,360** | ** ** | **$** | **(1,592** | **)** | **$** | **169,845** | ** ** | **$** | **(1,868** | **)** |

 
| ** **                               | ** ** | **December 31, 2005**        | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **Less than 12 Months** | ** ** | **12 Months or More** | ** ** | **Total** | ** ** |
| ** **                               | ** ** | **Fair  Value**                        | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| ** **                               | ** ** | **(In Thousands)**                | ** ** |
| Obligations of  U.S. government agencies |       | $                                      | 21,712     |   | $ | (289 | ) | $ | 65,330 |   | $ | (1,035 | ) | $ | 87,042 |   | $ | (1,324 | ) |
| State and  political subdivisions        |       | 7,619                                  |       | (78 | ) | 2,993 |   | (93 | ) | 10,612 |   | (171 | ) |
| Corporate debt  securities               |       | 1,943                                  |       | (91 | ) | 5,660 |   | (232 | ) | 7,603 |   | (323 | ) |
| Mortgage related  securities             |       | 87,071                                 |       | (858 | ) | 56,462 |   | (1,430 | ) | 143,533 |   | (2,288 | ) |
|                                     |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| **Total securities**                     |       | $                                      | 118,345    |   | $ | (1,316 | ) | $ | 130,445 |   | $ | (2,790 | ) | $ | 248,790 |   | $ | (4,106 | ) |

 

F-15

----

Management doesnot believe that any individual unrealized loss, other than the Company’s losson mutual funds in 2005 as described below, represents an other-than-temporaryimpairment at December 31, 2006 and 2005. The temporary impairment on all otherinvestments is directly related to changes in market interest rates.  As of December 31, 2005, the Company recordeda loss of $394,000 relating to a mutual fund that the Company determined wasother-than-temporarily impaired.  Ingeneral, as interest rates rise, the fair value of fixed-rate securities willdecrease and, as interest rates fall, the fair value of fixed-rate securitieswill increase. Of the 197 securities with a temporary impairment at December31, 2006, 195 have a credit rating of AAA and the remaining 2 are corporatebonds that all have a final maturity of less than 12 months. The severity ofthe impairment as a percent of total investment position is nominal and theduration of the impairment to date is short. The impairments are deemedtemporary based on the direct relationship of the decline in fair value tomovements in interest rates, as well as the relatively short duration of theinvestments and their high credit quality, and the Company’s ability and intentto hold these investments to recovery. Securities that have been impaired greater than twelve months include primarily mortgage-relatedsecurities.  The decline in the fairvalue of these securities was deemed temporary due to positive factorssupporting the recoverability of these investments and the Company’s abilityand intent to hold these investments to recovery.  Positive factors considered include timelyprincipal payments and the financial health of the issuer.

Additionally, the Company had oneprivate issue mortgage related security as of December 31, 2006. This securityhas a credit rating of AAA and its balance was $1.7 million and $2.4 million atDecember 31, 2006 and 2005, respectively.

The amortized cost and estimated fair value ofinvestment securities available-for-sale at December 31, 2006 and December 31,2005 by contractual maturity are as follows:
| ** **                              | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **Amortized  Cost**             | ** ** | **Fair  Value** | ** ** |
| ** **                              | ** ** | **(In Thousands)**         | ** ** |
| Due in one year  or less                |       | $                               | 21,082     |   | $ | 20,949 |   |
| Due after one  year through five years  |       | 15,279                          |       | 15,215 |   |
| Due after five  years through ten years |       | 19,479                          |       | 19,198 |   |
| Due after ten  years                    |       | 14,647                          |       | 14,750 |   |
|                                    |       | 70,487                          |       | 70,112 |   |
|                                         |            |                                 |            |  |  |  |  |

 

Grossgains of $0, $226,000 and $179,000 and gross losses of $17,000, $641,000 and$10,000 were realized on sales of securities during the years ended December31, 2006, 2005 and 2004, respectively.

Securitieswith a carrying value of $4,864,000 and $4,819,000 at December 31, 2006and 2005 respectively, were pledged to secure public deposits and for otherpurposes as required or permitted by law.

F-16

----

**NOTE 4 - LOANS**

Thecomposition of net loans at December 31, 2006 and 2005 is provided below(in thousands).  

|                                      | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Real estate  loans:                  |       |                  |       |   |   |
| One-to-four family                   |       | $                     | 209,463    |   | $ | 228,476 |   |
| Multi-family and commercial          |       | 41,720                |       | 32,923 |   |
| Construction                         |       | 11,568                |       | 31,015 |   |
|                                 |       |                  |       |   |   |
|                                 |       | 262,751               |       | 292,414 |   |
|                                 |       |                  |       |   |   |
| Consumer loans:                      |       |                  |       |   |   |
| Home equity                          |       | 73,456                |       | 65,003 |   |
| Automobile                           |       | 1,030                 |       | 1,280 |   |
| Lines of credit                      |       | 10,468                |       | 16,269 |   |
| Other                                |       | 148                   |       | 188 |   |
|                                 |       |                  |       |   |   |
|                                 |       | 85,102                |       | 82,740 |   |
|                                 |       |                  |       |   |   |
| Commercial loans                     |       | 11,155                |       | 175 |   |
|                                 |       |                  |       |   |   |
| **Total loans**                      |       | 359,008               |       | 375,329 |   |
|                                 |       |                  |       |   |   |
| Unearned loan  origination fees, net |       | (442                  | )          | (587 | ) |
| Allowance for  loan losses           |       | (2,949                | )          | (8,349 | ) |
|                                 |       |                  |       |   |   |
| **Net  loans**                       |       | $                     | 355,617    |   | $ | 366,393 |   |

 

The Company hadapproximately $18.7 million and $52.7 million of commercial mortgage andconstruction loans concentrated in the Southern New Jersey shore area atDecember 31, 2006 and 2005, respectively. Other than the construction loans in Southern New Jersey, a majority ofthe Company’s loans are in the geographic areas near the Company’s branches inSoutheastern Pennsylvania and New Jersey.

The Company reclassified $3,000 and $6,000 of deposit accounts that wereoverdrawn to other consumer loans as of December 31, 2006 and 2005,respectively.

F-17

----

The followingtable presents changes in the allowance for loan losses (in thousands):

|                                    | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                               |       |                                        |       |   |   |   |   |
| Balance,  beginning                |       | $                                           | 8,349      |   | $ | 14,391 |   | $ | 2,109 |   |
| Provision (credit) for loan losses |       | (5,394                                      | )          | (6,025 | ) | 12,282 |   |
| Loans charged off                  |       | (8                                          | )          | (17 | ) | — |   |
| Recoveries                         |       | 2                                           |       | — |   | — |   |
|                               |       |                                        |       |   |   |   |   |
| Balance, ending                    | ** ** | $                                           | 2,949      |   | $ | 8,349 |   | $ | 14,391 |   |

 

Therecorded investment in impaired loans, not requiring an allowance for loanlosses was $0 at December 31, 2006 and 2005.  The recorded investment in impaired loansrequiring an allowance for loan losses was $0 at December 31, 2006 and$3,720,000 at December 31, 2005. The related allowance for loan losses associated with these loans was $0at December 31, 2006 and $1,860,000 at December 31, 2005.  For the years ended December 31, 2006,2005 and 2004, the average recorded investment in these impaired loans was$2,548,000, $4,479,000 and $21,482,000, respectively.  The interest income recognized, representingcash collected, on these impaired loans was $631,000, $142,000 and $1,102,000for the years ended December 31, 2006, 2005 and 2004, respectively. Loans onwhich the accrual of interest has been discontinued amounted to $284,000 atDecember 31, 2006 and $3,520,000 at December 31, 2005.  There was one loan totaling $2,941,000 pastdue 90 days or more and still accruing interest at December 31, 2006 andno loans at December 31, 2005.  Therewere no loans classified as troubled debt restructurings as of December 31,2006 and 2005.

F-18

----

**NOTE 5 —MORTGAGE SERVICING ACTIVITY**

Loansserviced for others are not included in the accompanying consolidatedstatements of condition.  The unpaidprincipal balances of these loans were $130,294,000 at December 31, 2006,$136,584,000 at December 31, 2005, and $67,568,000 at December 31,2004.

Thefollowing summarizes mortgage-servicing rights for the years endedDecember 31, 2006, 2005 and 2004 (in thousands): 

|                                       | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------|------------|---------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                  |       |                                        |       |   |   |   |   |
| Balance,  beginning                   |       | $                                           | 1,168      |   | $ | 637 |   | $ | 219 |   |
| Mortgage servicing rights capitalized |       | 178                                         |       | 643 |   | 488 |   |
| Mortgage servicing rights amortized   |       | (169                                        | )          | (112 | ) | (70 | ) |
|                                  | ** ** |                                        |       |   |   |   |   |
| Balance, ending                       | ** ** | $                                           | 1,177      |   | $ | 1,168 |   | $ | 637 |   |

 

The estimated amortization expense ofamortizing mortgage servicing rights for each of the five succeeding fiscalyears after December 31, 2006 is as follows (in thousands):

| 2007       |   | $    | (192   | ) |
|------------|--------|------|--------|---|
| 2008       |   | (169 | )      |
| 2009       |   | (144 | )      |
| 2010       |   | (121 | )      |
| 2011       |   | (102 | )      |
| Thereafter |   | (449 | )      |
| Total      |   | $    | (1,177 | ) |

 

For the periodsended December 31, 2006 and 2005, the fair value of the mortgage servicingrights (“MSRs”) is $1,623,000 and $1,291,000, respectively.  The fair value of the MSRs for these periodswas determined using a third-party valuation model that calculates the presentvalue of estimated future servicing income. The model incorporates assumptionsthat market participants use in estimating future net servicing income,including estimates of prepayment speeds and discount rates.  Mortgage loan prepayment speed is the annualrate at which borrowers are forecasted to repay their mortgage loan principal andis based on historical experience. The discount rate used to determine thepresent value of future net servicing income - another key assumption in themodel - is the required rate of return the market would expect for an assetwith similar risk. Both assumptions can, and generally will, change quarterlyvaluations as market conditions and interest rates change.

F-19

----

**NOTE 6 - PREMISES AND EQUIPMENT**

Thecomponents of premises and equipment at December 31, 2006 and 2005 are asfollows (in thousands):

|                                    | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Land                               |       | $                     | 3,373      |   | $ | 2,960 |   |
| Buildings                          |       | 12,123                |       | 10,691 |   |
| Furniture,  fixtures and equipment |       | 4,849                 |       | 4,240 |   |
| Construction in  progress          |       | 2,530                 |       | 3,845 |   |
|                               |       | 22,875                |       | 21,736 |   |
| Less:  accumulated depreciation    |       | (8,588                | )          | (7,583 | ) |
| Net                                |       | $                     | 14,287     |   | $ | 14,153 |   |

 

Construction in progress at December 31, 2006 includesinvestments in several properties in New Jersey that the Company intends todevelop into future branches.  In 2006,the Company entered into an agreement to sell one of its building and certainequipment, which have a net book value of $736,000 at December 31, 2006. TheCompany expects to consummate this transaction in May 2007.

TheCompany leases office locations in Exton, Pennsylvania and Media, Pennsylvaniaand a small amount of office equipment under operating leases.  Thefollowing rental expenses were included in the Company’s financial statements(in thousands):

|                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------|------------|----------|------------|----------|------------|----------|------------|
| Office rent     |       | $        | 96         |     | $          | —   |       | $ | — |   |
| Equipment lease |       | 12       |       | —   |       | —   |       |
|            |       | $        | 108        |     | $          | —   |       | $ | — |   |

 

The following table shows the minimum future rental payments undernon-cancelable leases for property and equipment (in thousands):

| 2007 |   | $      | 120    |   |
|------|--------|--------|--------|--------|
| 2008 |   | 33     |   |
| 2009 |   | 5      |   |
| 2010 |   | — |   |
| 2011 |   | — |   |

 

 

F-20

----

**NOTE 7 - DEPOSITS**

Depositsand their respective weighted average interest rate at December 31, 2006and 2005 consist of the following (dollars in thousands):  

|                                       | ** ** | **December 31,**                     | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
| ** **                            | ** ** | **Weighted  Average  Interest Rate** | ** ** | **Amount** | ** ** | **Weighted  Average  Interest Rate** | ** ** | **Amount** | ** ** |
|                                  |       |                                      |       |   |   |   |   |   |   |
| Non-interest bearing  demand accounts |       | —                                    | %          | $ | 41,429 |   | — | % | $ | 37,876 |   |
| NOW accounts                          |       | 1.80                                      |       | 50,717 |   | 1.64 |   | 87,072 |   |
| Money market accounts                 |       | 3.92                                      |       | 29,770 |   | 0.90 |   | 27,975 |   |
| Savings and club  accounts            |       | 0.74                                      |       | 64,338 |   | 0.72 |   | 80,098 |   |
| Certificates of deposit               |       | 4.43                                      |       | 410,280 |   | 3.67 |   | 449,286 |   |
|                                  |       | 3.47                                      | %          | $ | 596,534 |   | 2.75 | % | $ | 682,307 |   |

 

Thescheduled maturities of certificates of deposit for periods subsequent toDecember 31, 2006 and December 31, 2005 are as follows (in thousands):

|            | ** ** | **December 31,** | ** ** |
|------------|------------|-----------------------|------------|
| ** ** | ** ** | **2006**              | ** ** |
| ** ** | ** ** | ** **            | ** ** |
| 2007       |       | $                     | 223,735    |   |
| 2008       |       | 67,076                |       |
| 2009       |       | 63,947                |       |
| 2010       |       | 19,524                |       |
| 2011       |       | 20,929                |       |
| Thereafter |       | 15,069                |       |
| ** ** |       |                  |       |
| ** ** |       | $                     | 410,280    |   |

 

Asummary of interest expense on deposits for the years ended December 31,2006, 2005 and 2004 is as follows (in thousands):

|                            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| NOW accounts               |       | $        | 1,104      |     | $          | 1,826    |       | $ | 316 |   |
| Money market  accounts     |       | 579      |       | 265      |       | 1,743    |       |
| Savings and club  accounts |       | 557      |       | 748      |       | 904      |       |
| Certificates of  deposit   |       | 16,734   |       | 16,373   |       | 15,241   |       |
| ** **                 |       | $        | 18,974     |     | $          | 19,212   |       | $ | 18,204 |   |

 

F-21

----

The aggregateamount of certificates of deposit with a minimum denomination of $100,000 was$73,945,000 and $69,349,000 at December 31, 2006 and 2005,respectively.  Deposits in excess of$100,000 are not insured by the Federal Deposit Insurance Corporation.

**NOTE 8 —FEDERAL HOME LOAN BANK ADVANCES**

Pursuantto collateral agreements with the FHLB, advances are secured by qualifyingfirst mortgage loans, qualifying fixed-income securities, FHLB stock and an interest-bearingdemand deposit account with the FHLB. As of December 31, 2006, the Bank has$34,500,000 in qualifying collateral pledged against its advances.

| Maturity Date | ** ** | **Interest Rate** | ** ** | **Strike Rate** | ** ** | **Amount**         | ** ** |
|--------------------|------------|------------------------|------------|----------------------|------------|--------------------|------------|
| ** **         | ** ** | ** **             | ** ** | ** **           | ** ** | **(in thousands)** | ** ** |
| August 2011        |       | 4.89                   | %          | 7.50                 | %          | $                  | 20,000     |   |
| August 2011        |       | 4.87                   | %          | 7.50                 | %          | 10,000             |       |
| ** **         | ** ** | ** **             | ** ** | ** **           |       | $                  | 30,000     |   |

 

If theComparative Rate Index (three-month LIBOR) is greater than or equal to theStrike Rate 15 calendar days prior to the 1st Possible Conversion Date or any subsequentPossible Conversion Date, the FHLB will notify the Bank 10 calendar days priorto conversion to an adjustable-rate Advance equal to three-month LIBOR (5.36%at December 31, 2006) plus .2175% on a quarterly basis. The Bank has the optionto repay these advances at each of the option dates without penalty.Accordingly, the contractual maturities above may differ from actualmaturities.

The Bankhas a maximum borrowing capacity with the Federal Home Loan Bank ofapproximately $460.4 million at September 30, 2006, the latest dateavailable.

**NOTE 9 — EMPLOYEE BENEFITS**

**Defined Benefit Plan**

The Bankhas a qualified non-contributory defined benefit retirement plan coveringsubstantially all employees meeting certain eligibility requirements.  The assets of the Bank’s defined benefit planare held by a trustee and invested in mutual funds and cash equivalents.  For the years ended December 31, 2006 and2005, the composition of the funds was 33.0% and 96.1%, respectively in mutualfunds and 67.0% and 3.9%, respectively in cash. Certain cash equivalents are held in deposit accounts at the Bank.  The investment strategy of the Plan is tomaintain an adequate return while meeting the liquidity needs of the Plan.  The benefits are based on each employee’syears of service and the average of the highest three or five consecutiveannual salaries.  An employee becomesfully vested upon completion of five years of qualifying service.  It has been the Bank’s policy to fund themaximum amount that can be deducted for federal income tax purposes eachyear.   The Bank amended the plan andfroze the benefits for current participants in the plan as of January 1,2006.  As a result of this amendment, theBank recognized a curtailment loss of $375,000 effective December 31, 2005,which was included in salaries, benefits and other compensation on theConsolidated Statements of Operations for the year ended December 31,2005.  In October 2006, the Bank resolvedto settle the obligations to the plan participants in 2007 by terminating theplan, after obtaining required approvals. As of December 31, 2006, the Bank has accrued liabilities sufficient tosettle the estimated unfunded obligation.

F-22

----

EffectiveDecember 31, 2006, the Bank adopted SFAS Statement No. 158, “Employers’ Accountingfor Defined Benefit Pensions and Other Post Retirement Plans.”  See Note 1 for the incremental effects of theinitial adoption of SFAS Statement No. 158 on our statement of condition atDecember 31, 2006.

Thefollowing tables provide a roll forward of the changes in benefit obligationsand plan assets for the most recent two years: 

|                                                  | ** ** | **2006**                | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|----------|------------|
| **Change in benefit obligation:** | ** ** | **(In Thousands)** | ** ** |
| ** **                                       |       |                    |       |     |       |
| Net benefit obligation  at beginning of year     |       | $                       | 2,195      |     | $          | 2,187 |   |
| Service cost                                     |       | —                  |       | 300      |       |
| Interest cost                                    |       | 121                     |       | 131      |       |
| Plan amendment                                   |       | —                  |       | (297     | )          |
| Actuarial loss                                   |       | 197                     |       | 91       |       |
| Benefits paid                                    |       | (124                    | )          | (217     | )          |
| Net benefit obligation at end of year            |       | $                       | 2,389      |     | $          | 2,195 |   |

 

|                                                 | ** ** | **2006**                | ** ** | **2005** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|----------|------------|
| **Change in plan assets:**       | ** ** | **(In Thousands)** | ** ** |
| ** **                                      |       |                    |       |     |       |
| Fair value of plan  assets at beginning of year |       | $                       | 1,934      |     | $          | 1,764 |   |
| Actual return on plan  assets                   |       | 204                     |       | 110      |       |
| Employer contributions                          |       | 288                     |       | 277      |       |
| Benefits paid                                   |       | (124                    | )          | (217     | )          |
| Fair value of plan assets at end of year        |       | $                       | 2,302      |     | $          | 1,934 |   |

 

The fair value of plan assets included deposits held at the Bank of$395,000 and $386,000 at December 31, 2006 and 2005, respectively.

Thefollowing table provides a reconciliation of benefit obligations, plan assetsand funded status of the plans:

|                                                           | ** ** | **2006**                | ** ** | **2005** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                | ** ** | **(In Thousands)** | ** ** |
| Fair value of plan  assets end of year                    |       | $                       | 2,302      |     | $          | 1,934 |   |
| Net benefit obligation  at end of year                    |       | 2,389                   |       | 2,195    |       |
|                                                      |       |                    |       |     |       |
| Funded Status  (plan assets less plan obligations)        |       | $                       | (87        | )        | $          | (261 | ) |
| Net amount  recognized in the statement of condition      |       | $                       | (87        | )        | $          | (261 | ) |
| Amounts recognized in  stockholders’ equity          |       |                    |       |     |       |
| Net actuarial  loss                                       |       | $                       | (148       | )        | —     |   |
| Deferred tax  asset                                       |       | 50                      |       | —   |       |
| Amount recognized in accumulated other comprehensive loss |       | $                       | (98        | )        | —     |   |

** **

F-23

----

The following is a summary of significant actuarialassumptions (weighted average basis) at December 31, 2006, 2005 and 2004:

|                                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate                                     | ** ** | 5.00     | %          | 5.50     | %          | 6.00     | %          |
| Expected long-term rate  of return on plan assets | ** ** | 5.25     |       | 8.00     |       | 8.00     |       |
| Rate of compensation increase                     | ** ** | —   |       | 5.00     |       | 5.00     |       |

 

The Bank determined the long-term rate of return onplan assets based on current and expected asset allocations as well ashistorical returns and current market conditions.  The discount rate assumptions were based onthe short-term plan cash outflows expected to occur when the plan terminates in2007.

Thefollowing table sets forth the components of the defined benefit plan costs forthe years presented:

|                                                                                                    | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                         | ** ** | **(In Thousands)** | ** ** |
| Service cost                                                                                       |       | $                       | —     |     | $          | 300      |       | $ | 295 |   |
| Interest cost                                                                                      |       | 121                     |       | 131      |       | 137      |       |
| Return on plan assets                                                                              |       | (204                    | )          | (110     | )          | (198     | )          |
| Amortization of  unrecognized net actuarial gain                                                   |       | 49                      |       | 3        |       | 119      |       |
| Curtailment loss                                                                                   |       | —                  |       | 375      |       | —   |       |
| Net periodic benefit costs (income) reported in salaries, benefits  and other compensation expense |       | $                       | (34        | )        | $          | 699      |       | $ | 353 |   |

 

**401(k) Plan**

The Bankalso has a 401(k) retirement plan covering substantially all employees meetingcertain eligibility requirements. Employees may contribute an elective deferral percentage of their salaryto the Plan each year, subject to limitations which are set by law.  The Bank matches a portion of the employees’contribution and also may make discretionary contributions, based on the Bank’sperformance.  The Bank provides amatching contribution equivalent of 33% of the first 6% of the contributionmade by an employee.  The Bank’s matchingcontribution rate changed as of January 1, 2006 from 25% to 33%.  The Bank’s contributions to the plan onbehalf of its employees resulted in an expenditure of $94,000, $27,000 and$23,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

**Employee Stock Ownership Plan**

The ESOPis a tax-qualified plan designed to invest primarily in the Company’s commonstock that provides employees meeting certain eligibility requirements with theopportunity to receive a funded retirement benefit, based primarily on thevalue of the Company’s common stock.  TheESOP purchased 575,446 shares of the Company’s common stock at a price of $10.00per share with the proceeds of a loan from the Company to the ESOP.  The outstanding loan principal balance atDecember 31, 2006 was $5,232,000.  Sharesof the Company’s common stock pledged as collateral for the loan are releasedfrom the pledge for allocation to Plan participants as loan payments aremade.  The Bank releases shares

F-24

----

annuallybased upon the ratio that the current principal and interest payment bears tothe current and remaining scheduled future principal and interestpayments.  Dividends declared on commonstock held by the ESOP and not allocated to the account of a participant can beused to repay the loan.

AtDecember 31, 2006, shares allocated and committed to be released were 38,363.ESOP shares that were unallocated totaled 537,083 and had a fair market valueof $7,251,000.  ESOP compensation expensefor the year ended December 31, 2006 was $512,000 representing the fair marketvalue of shares allocated or committed to be released during the year.

# **Long-Term Incentive Plan**

The Bank maintains the Fox Chase Bank Executive Long-Term IncentivePlan to retain and attract key officers whocontribute to the financial and business success of the Bank.  On an annual basis, the Board of Directorsconsiders granting a long—term incentive award for the Chief Executive Officerof the Bank and the Chief Executive Officer recommends the incentive awardamounts for each eligible employee. Substantially all of the awards vest over a five-year period with 60% ofthe award vesting on the third anniversary of the plan year to which the awardwas granted, 80% on the fourth anniversary and 100% on the fifth anniversary,unless otherwise determined by the Board of Directors on date of grant.  All plan assets are invested in Companycommon stock.  The Incentive Plan becameeffective January 1, 2006.  During 2006,the Bank recorded compensation expenses of $144,000 for the IncentivePlan.  Remaining unvested compensation,which is invested in Company common stock, is $471,000 at December 31,2006.  Such amounts will be ratablyrecognized as compensation expense over the remaining vesting periods.

**NOTE 10 — INCOME TAXES**

Thecomponents of income tax expense (benefit) for the years endedDecember 31, 2006, 2005 and 2004 are as follows (in thousands):

|                | ** ** | **December 31,** | ** ** |
|----------------|------------|-----------------------|------------|
| ** **     | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Federal:       |       |                  |       |   |   |   |   |
| Current        |       | $                     | (313       | ) | $ | 950 |   | $ | 2,420 |   |
| Deferred       |       | 997                   |       | 2,025 |   | (4,020 | ) |
|           |       |                  |       |   |   |   |   |
|           |       | 684                   |       | 2,975 |   | (1,600 | ) |
|           |       |                  |       |   |   |   |   |
| State, current |       | —                |       | — |   | 5 |   |
|           |       |                  |       |   |   |   |   |
| ** **     |       | $                     | 684        |   | $ | 2,975 |   | $ | (1,595 | ) |

 

F-25

----

Theprovision (benefit) for income taxes differs from the statutory rate of 34% dueto the following (in thousands):

|                                              | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                         |       |                  |       |   |   |   |   |
| Federal income  tax at statutory rate of 34% | ** ** | $                     | 1,468      |   | $ | 3,038 |   | $ | (1,184 | ) |
| Tax exempt  interest, net                    |       | (272                  | )          | (222 | ) | (206 | ) |
| Bank-owned life  insurance                   |       | (145                  | )          | (152 | ) | (152 | ) |
| ESOP  compensation expense                   |       | 44                    |       | — |   | — |   |
| Other, net                                   |       | (99                   | )          | (1 | ) | (53 | ) |
| Increase  (decrease) in valuation allowance  |       | (312                  | )          | 312 |   | — |   |
|                                         |       |                  |       |   |   |   |   |
| **Total provision (benefit)**                |       | $                     | 684        |   | $ | 2,975 |   | $ | (1,595 | ) |
| ** **                                   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Effective  tax rate**                      |       | 15.84                 | %          | 33.30 | % | 45.79 | % |

 

The netdeferred tax asset consisted of the following components as ofDecember 31, 2006 and 2005 (in thousands): 
| ** **                                          | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Deferred tax assets:                                |       |                  |       |   |   |
| Allowance for  loan losses                          |       | $                     | 1,003      |   | $ | 2,839 |   |
| Loan origination  fees                              |       | 88                    |       | 87 |   |
| Nonaccrual  interest                                |       | 7                     |       | 68 |   |
| Unrealized  losses on securities available-for-sale |       | 482                   |       | 1,259 |   |
| Unrealized loss  from impaired securities           |       | —                |       | 134 |   |
| Accrued  compensation                               |       | 81                    |       | — |   |
| Organizational  costs                               |       | 3                     |       | — |   |
| Unfunded pension  obligation — SFAS No. 158    |       | 50                    |       | — |   |
| Charitable  contribution carryover                  |       | 535                   |       | — |   |
| Capital loss carryover                              |       | 318                   |       | 178 |   |
|                                                |       |                  |       |   |   |
|                                                |       | 2,567                 |       | 4,565 |   |
|                                                |       |                  |       |   |   |
| Valuation allowance                                 |       | —                |       | (312 | ) |
|                                                |       | 2,567                 |       | 4,253 |   |
| Deferred tax liabilities:                           |       |                  |       |   |   |
| Prepaid expense  deduction                          |       | 197                   |       | 98 |   |
| Mortgage  servicing rights                          |       | 400                   |       | 397 |   |
| Loan origination  costs                             |       | 148                   |       | 148 |   |
| Depreciation of  premises and equipment             |       | 735                   |       | 799 |   |
|                                                |       |                  |       |   |   |
|                                                |       | 1,480                 |       | 1,442 |   |
|                                                |       |                  |       |   |   |
| **Net Deferred Tax Asset**                          |       | $                     | 1,087      |   | $ | 2,811 |   |

 

F-26

----

Based onthe Company’s history of prior earnings and its expectation of future taxableincome, management anticipates that it is more likely than not that the abovenet deferred tax assets will be realized.

Retainedearnings include $5,986,000 at December 31, 2006, 2005 and 2004, for whichno provision for federal income tax has been made.  This amount represents deductions for baddebt reserves for tax purposes, which were only allowed to savings institutionsthat met certain definitional tests prescribed by the Internal Revenue Code of1986, as amended.  The Small Business JobProtection Act of 1996 eliminated the special bad debt deduction granted solelyto thrifts.  Under the terms of the Act,there would be no recapture of the pre-1988 (base year) reserves. However,these pre-1988 reserves would be subject to recapture under the rules of theInternal Revenue Code if the Company pays a cash dividend in excess of earningsand profits, or liquidates.  The Act alsoprovides for the recapture of deductions arising from “applicable excessreserve” defined as the total amount of reserve over the base year reserve. TheCompany’s total reserve exceeds the base year reserve and deferred taxes havebeen provided for this excess.

As ofDecember 31, 2006 and 2005, the Company has approximately $935,000 and $524,000of capital loss carryforwards for Federal income tax purposes, respectively, aswell as unrealized losses on certain capital asset securities of $0 and$394,000, resulting in a deferred tax asset of $318,000 and $312,000,respectively. The Company had established a valuation allowance for the$312,000 at December 31, 2005.  The Bankentered into an agreement to sell one of its office facilities in the fourthquarter of 2006 that is projected to result in sufficient capital gain incometo utilize such capital loss carryforwards. As a result of the expected sale, the Company fully reversed thevaluation allowance in 2006.

Capitallosses can be carried back three years and forward five years before theyexpire.  The Company’s unused capitallosses will expire after December 31, 2010, if not utilized.  In addition, the Company has a charitablecontribution carryover of $1,572,000 as of December 31, 2006.  Such carryover will expire on December 31,2011, if not utilized.

**NOTE 11 — COMMITMENTS AND CONTINGENCIES**

**Lending Operations**

TheCompany is a party to financial instruments with off-balance sheet risk in thenormal course of business to meet the financing needs of its customers.  These financial instruments include commitmentsto extend credit.  Those instrumentsinvolve, to varying degrees, elements of credit risk in excess of the amountrecognized in the balance sheets.

TheCompany’s exposure to credit loss in the event of nonperformance by the otherparty to the financial instrument for commitments to extend credit isrepresented by the contractual amount of those instruments.  The Company uses the same credit policies inmaking commitments and conditional obligations as it does for on-balance sheetinstruments.

F-27

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A summaryof the Company’s financial instrument commitments at December 31, 2006 and2005 is as follows (in thousands):

|                                             | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                                        |       |                  |       |   |   |
| Commitments to grant  loans                 |       | $                     | 40,134     |   | $ | 2,245 |   |
| Unfunded commitments  under lines of credit |       | 29,232                |       | 24,826 |   |
| Standby letters of  credit                  |       | 112                   |       | — |   |
|                                        |       |                  |       |   |   |
|                                        |       | $                     | 69,478     |   | $ | 27,071 |   |

 

Commitmentsto extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract.  Since many of the commitments are expected toexpire without being drawn upon, the total commitment amounts do notnecessarily represent future cash requirements. Commitments generally have fixed expiration dates or other terminationclauses and may require payment of a fee. The Company evaluates each customer’s credit worthiness on acase-by-case basis.  The amount ofcollateral obtained, if deemed necessary by the Company upon extension ofcredit, is based on management’s credit evaluation.  Collateral held varies, but includesprincipally residential or commercial real estate.  Fixed rate commitments to grant loans were$4,346,000 and $2,245,000 as of December 31, 2006 and December 31, 2005,respectively.  The interest rates onthese fixed rate loans ranged from 5.875% to 7.85% as of December 31, 2006 and5.375% to 6.25% as of December 31, 2005. In addition, at December 31, 2006 the Company had undisbursed loans inprocess of $10,348,000.

# **Legal Proceedings**

TheCompany is commonly subject to various pending and threatened legal actionswhich involve claims for monetary relief. Based upon information presently available to the Company, it is theCompany’s opinion that any legal and financial responsibility arising from suchclaims will not have a material adverse effect on the Company’s results ofoperations.

OnApril 28, 2006, Gregory S. Cipa, the former President and Chief ExecutiveOfficer of Fox Chase Bank, filed a complaint against Fox Chase Bank in theCivil Division of the Court of Common Pleas of Bucks County, Pennsylvania.  In May 2006, Fox Chase Bank moved the case tofederal court, answered the complaint and filed a counterclaim. In November2006, Mr. Cipa amended his complaint, and now alleges Fox Chase Bank breachedits contract with him and violated its state statutory obligations by failingto pay Mr. Cipa certain employment benefits which he claims to have earnedwhile serving as the President and Chief Executive Officer of Fox ChaseBank.  Mr. Cipa seeks monetarydamages in excess of $900,000 and the payment of litigation costs.  The parties completed discovery and filedmotions for summary judgment that have not yet been ruled upon.  Fox Chase Bank believes this action is withoutmerit and intends to vigorously pursue its defenses.

F-28

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# **Data Processing**

The Company has entered intocontracts with third-party providers to manage the Company’s networkoperations, data processing and other related services.  The projected amount of the Company’s futureminimum payments contractually due after December 31, 2006 is as follows (inthousands):

| 2007 |   | $      | 1,742  |   |
|------|--------|--------|--------|--------|
| 2008 |   | 1,711  |   |
| 2009 |   | 1,527  |   |
| 2010 |   | 3      |   |
| 2011 |   | — |   |

 

**NOTE 12 - REGULATORY CAPITAL**

The Bank is subject to various regulatory capitalrequirements administered by federal banking agencies.  Failure to meet minimum capital requirementscan initiate certain mandatory and possibly additional discretionary actions byregulators that, if undertaken, could have a direct material effect on the Bank’sconsolidated financial statements.  Undercapital adequacy guidelines and the regulatory framework for prompt correctiveaction, the Bank must meet specific capital guidelines that involvequantitative measures of the Bank’s assets, liabilities and certain off-balancesheet items as calculated under regulatory accounting practices.  The Bank’s capital amounts and classificationare also subject to qualitative judgments by the regulators about components,risk weightings and other factors.

Quantitativemeasures established by regulation to ensure capital adequacy require the Bankto maintain minimum amounts and ratios (set forth below) of total andTier 1 capital (as defined in the regulations) to risk-weighted assets,and of Tier 1 capital to total assets, as defined.  Management believes, as of December 31,2006, that the Bank meets all capital adequacy requirements to which it wassubject.

F-29

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As ofDecember 31, 2006, the Bank is categorized as well capitalized under theregulatory framework for prompt corrective action.  There are no conditions or events since thatnotification that management believes have changed the Bank’s category.

The Bank’sactual capital amounts and ratios at December 31, 2006 and 2005 and theminimum amounts and ratios required for capital adequacy purposes and to bewell capitalized under the prompt corrective action provisions are as follows:
| ** **                                           | ** ** | **Actual**                           | ** ** | **For Capital Adequacy  Purposes** | ** ** | **To be Well Capitalized  under Prompt  Corrective Action  Provisions** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **Amount**                           | ** ** | **Ratio**                                    | ** ** | **Amount**                                                                                       | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                                           | ** ** | **(Dollars in Thousands)** | ** ** |
| **December 31, 2006**                                | ** ** | ** **                           | ** ** | ** **                                   | ** ** | ** **                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total risk-based  capital (to risk- weighted assets) |       | $                                    | 97,701     | ** **                                   | 27.62      | %                                                                                                | $          | 328,297 | ** ** | 38.0 | % | $ | 335,371 | ** ** | 310.0 | % |
| Tier 1 capital  (to risk-weighted assets)            |       | 94,751                               |       | 26.79                                        |       | 314,148                                                                                     |       | 34.0 |   | 321,222 |   | 3 6.0 |   |
| Tier 1 capital  (to adjusted assets)                 |       | 94,751                               |       | 12.49                                        |       | 330,343                                                                                     |       | 34.0 |   | 337,929 |   | 3 5.0 |   |
|                                                 | ** ** | ** **                           | ** ** | ** **                                   | ** ** | ** **                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **December 31, 2005:**                               | ** ** | ** **                           | ** ** | ** **                                   | ** ** | ** **                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total risk-based  capital (to risk- weighted assets) |       | $                                    | 70,595     |                                         | 19.02      | %                                                                                                | $          | 329,688 |   | 38.0 | % | $ | 337,109 |   | 310.0 | % |
| Tier 1 capital  (to risk-weighted assets)            |       | 65,911                               |       | 17.76                                        |       | 314,844                                                                                     |       | 34.0 |   | 322,266 |   | 3 6.0 |   |
| Tier 1 capital  (to adjusted assets)                 |       | 65,911                               |       | 8.40                                         |       | 331,382                                                                                     |       | 34.0 |   | 339,228 |   | 3 5.0 |   |

 

TheCompany’s ability to pay dividends is limited by statutory and regulatoryrequirements.  The Company may notdeclare nor pay dividends on its stock if such declaration and payment wouldviolate statutory or regulatory requirements.

**During2005, the Bank’s primary regulator the Office of Thrift Supervision (the “OTS”)issued a Cease and Desist Order (the “Order”) instructing the Bank todiscontinue the origination of certain types of loans until further notice,among other restrictions.  On June 28,2006, the OTS terminated the Order, and also noted that the Bank is no longerdeemed to be in a “troubled condition.”**

**NOTE 13- FAIR VALUE OF FINANCIAL INSTRUMENTS**

Managementuses its best judgment in estimating the fair value of the Company’s financialinstruments; however, there are inherent weaknesses in any estimationtechnique.  Therefore, for substantiallyall financial instruments, the fair value estimates herein are not necessarilyindicative of the amounts the Company could have realized in a salestransaction on the dates indicated.  Theestimated fair value amounts have been measured as of their respective yearends, and have not been reevaluated or updated for purposes of theseconsolidated financial statements subsequent to those respective dates.  As such, the estimated fair values of thesefinancial instruments subsequent to the respective reporting dates may bedifferent than the amounts reported at each year-end.

F-30

----

Thefollowing information should not be interpreted as an estimate of the fairvalue of the entire Company since a fair value calculation is only provided fora limited portion of the Company’s assets and liabilities.  Due to a wide range of valuation techniquesand the degree of subjectivity used in making the estimates, comparisonsbetween the Company’s disclosures and those of other companies may not bemeaningful.  The following methods andassumptions were used to estimate the fair values of the Company’s financialinstruments at December 31, 2006 and 2005:

**Cash andCash Equivalents**

Thecarrying amounts of cash and cash equivalents approximate their fair value.

**InterestEarning Time Deposits in Other Banks**

The carryingamount of interest bearing time deposits in other banks maturing within ninetydays approximates their fair values. Fair values of other interest bearing time deposits are estimated usingdiscounted cash flow analyses based on current rates for similar types of timedeposits.

**Securities— Available-for-Sale**

Fairvalues for investments securities and mortgage-related securitiesavailable-for-sale are based on quoted market prices, where available.  If quoted market prices are not available,fair values are based on quoted market prices of comparable securities.

**LoansHeld for Sale**

The fairvalues of mortgage loans originated and intended for sale in the secondarymarket are based on current quoted market prices.

**LoansReceivable**

Forvariable-rate loans that reprice frequently and that entail no significantchanges in credit risk, fair values are based on carrying values.  The fair value of fixed rate and other loansare estimated using discounted cash flow analyses at interest rates currentlyoffered for loans with similar terms to borrowers of similar credit quality.

**FederalHome Loan Bank Stock**

The fair value of the Federal Home Loan Bankstock is the carrying amount.

**MortgageServicing Rights**

The fairvalue of mortgage servicing rights is based on third party estimates of valuewhen available or the present value of expected future cash flows when notavailable.

**AccruedInterest and Dividends Receivable and Accrued Interest Payable**

Thecarrying amount of accrued interest and dividends receivable and accruedinterest payable approximates fair value.

**DepositLiabilities**

Fairvalues for demand deposits (including NOW accounts), savings and club accountsand money market deposits are, by definition, equal to the amount payable ondemand at the reporting date.  Fairvalues of

F-31

----

fixed-maturitycertificates of deposit are estimated using a discounted cash flow calculationthat applies interest rates currently being offered on similar instruments withsimilar maturities.

**FederalHome Loan Bank Advances**

Fairvalue of Federal Home Loan Bank advances is estimated using discounted cashflow analyses, based on rates currently available to the Bank for advances withsimilar terms and remaining maturities.

**Off-BalanceSheet Financial Instruments**

Fairvalue of commitments to extend credit are estimated using the fees currentlycharged to enter into similar agreements, taking into account market interestrates, the remaining terms and present credit worthiness of the counterparties.

Theestimated fair values of the Company’s financial instruments atDecember 31, 2006 and 2005 were as follows (in thousands): 
| ** **                                 | ** ** | **December 31** | ** ** |
|--------------------------------------------|------------|----------------------|------------|
| ** **                                 | ** ** | **2006**             | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **Carrying  Amount** | ** ** | **Estimated  Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Estimated  Fair  Value** | ** ** |
|                                       |       |                 |       |   |   |   |   |   |   |
| Financial assets:                          |       |                 |       |   |   |   |   |   |   |
| Cash and cash  equivalents                 |       | $                    | 134,441    |   | $ | 134,441 |   | $ | 46,086 |   | $ | 46,086 |   |
| Interest earning  time deposits            |       | —               |       | — |   | 600 |   | 600 |   |
| Investment  securities available-for- sale |       | 70,112               |       | 70,112 |   | 141,783 |   | 141,783 |   |
| Mortgage related  securities               |       | 158,320              |       | 158,320 |   | 187,721 |   | 187,721 |   |
| Loans receivable,  net                     |       | 355,617              |       | 350,430 |   | 366,393 |   | 360,337 |   |
| Loans held for  sale                       |       | 1,194                |       | 1,194 |   | 357 |   | 357 |   |
| Mortgage  servicing rights                 |       | 1,177                |       | 1,623 |   | 1,168 |   | 1, 291 |   |
| Federal Home  Loan Bank stock              |       | 4,422                |       | 4,422 |   | 4,146 |   | 4,146 |   |
| Accrued interest  and dividends receivable |       | 3,397                |       | 3,397 |   | 3,301 |   | 3,301 |   |
|                                       |       |                 |       |   |   |   |   |   |   |
| Financial liabilities:                     |       |                 |       |   |   |   |   |   |   |
| Savings and club  accounts                 |       | 64,338               |       | 64,338 |   | 80,098 |   | 80,098 |   |
| Demand, NOW and  money market deposits     |       | 121,916              |       | 121,916 |   | 152,923 |   | 152,923 |   |
| Certificates of  deposit                   |       | 410,280              |       | 410,942 |   | 449,286 |   | 444,208 |   |
| Federal Home  Loan Bank advances           |       | 30,000               |       | 29,933 |   | 30,000 |   | 30,321 |   |
| Accrued interest  payable                  |       | 298                  |       | 298 |   | 268 |   | 268 |   |
|                                       |       |                 |       |   |   |   |   |   |   |
| Off-balance sheet  instruments             | ** ** | **—**           | ** ** | **521** |   | — | ** ** | **203** | ** ** |
|                                            |            |                      |            |  |  |  |  |  |  |  |  |  |  |

 

 

F-32

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**NOTE 14 -COMPREHENSIVE INCOME (LOSS)**

Comprehensive income(loss) for the years ended December 31, 2006, 2005 and 2004 is as follows (inthousands):

|                                                                                                                                     | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                          | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                                                                                                   |       | $                                           | 3,634      |   | $ | 5,960 |   | $ | (1,888 | ) |
| ** **                                                                                                                          |       |                                        |       |   |   |   |   |
| Other comprehensive  income (loss):                                                                                                 |       |                                        |       |   |   |   |   |
| Unrealized holding  gains (losses) arising during the period, net of taxes (2006 —$777, 2005-  $(1,114), 2004 — $(587))   |       | 1,447                                       |       | (2,163 | ) | (1,140 | ) |
|                                                                                                                                |       |                                        |       |   |   |   |   |
| Reclassification adjustment  for gains (losses) included in net income (loss), net of taxes (2006 - $0,  2005 - $(275), 2004 - $56) |       | —                                      |       | (534 | ) | 113 |   |
| ** **                                                                                                                          | ** ** | ** **                                  |       |   |   |   |   |
| Other comprehensive  income (loss)                                                                                                  | ** ** | 1,447                                       |       | (1,629 | ) | (1,253 | ) |
|                                                                                                                                | ** ** |                                        |       |   |   |   |   |
| Comprehensive income (loss)                                                                                                         | ** ** | $                                           | 5,081      |   | $ | 4,331 |   | $ | (3,141 | ) |

 

**NOTE 15 — RELATED PARTY TRANSACTIONS**

TheCompany may from time to time enter into transactions with its directors,officers and employees.  Suchtransactions are made in the ordinary course of business on substantially thesame terms and conditions, including interest rates and collateral, as thoseprevailing at the same time for comparable transactions with other customers,and do not, in the opinion of management, involve more than the normal creditrisk or present other unfavorable features.

An analysisof the activity of loans to directors and executive officers as of December 31,2006 and 2005 is as follows (in thousands):

|                                             | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                                        |       |                  |       |   |   |
| Beginning balance                           | ** ** | $                     | 5,277      |   | $ | 6,475 |   |
| New loans and line of credit  advances      | ** ** | —                |       | — |   |
| Repayments                                  | ** ** | —                |       | (587 | ) |
| Change in directors and  executive officers | ** ** | (5,277                | )          | (611 | ) |
|                                        | ** ** |                  |       |   |   |
| Ending balance                              | ** ** | $                     | —     |   | $ | 5,277 |   |

 

As ofDecember 31, 2006, the Company had $569,000 in outstanding deposits withrelated parties, none of which were overdrawn throughout the year.

F-33

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**NOTE 16 -****IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS**

On December 16,2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-BasedPayment,” which replaces SFAS No. 123, “Accounting for Stock-Based Compensation”and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”This statement will require that all share-based payments to employees,including grants of employee stock options, be recognized as compensation costsin the financial statements based on their fair values. The effective date ofthis statement for the Company was January 1, 2006. We adopted this standard asrequired, in accounting for the Long-Term Incentive Plan discussed in Note 9,which includes unvested shares.

In December 2004,the FASB issued SFAS No. 153, “Exchanges of Non-Monetary Assets, an amendmentof APB Opinion No. 29,” which eliminates the exception from fair valuemeasurement for non-monetary exchanges of similar productive assets and replacesit with a general exception for exchanges of non-monetary assets that do nothave commercial substance. The statement defines a non-monetary exchange withcommercial substance as one in which the future cash flows of an entity areexpected to change significantly as a result of the exchange. SFAS No. 153 iseffective for fiscal years beginning after June 15, 2005. The Company adoptedthis statement and there was no effect on its results of operations orfinancial position.

In May 2005, theFASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” whichestablishes, unless impracticable, retrospective application as the requiredmethod for reporting a change in accounting principle in the absence ofexplicit transition requirements specific to the newly adopted accountingprinciple. The statement provides guidance for determining whetherretrospective application of a change in accounting principle is impracticable.The statement also addresses the reporting of a correction of an error by restatingpreviously issued financial statements. SFAS No. 154 is effective foraccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. The Company adopted this statement and there was noeffect on its results of operations or financial position.

In March 2006, theFASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets, anamendment of SFAS No. 140.”  SFAS No. 156amends SFAS No. 140 with respect to the accounting for separately recognizedservicing assets and servicing liabilities by requiring an entity to recognizea servicing asset or liability each time it undertakes an obligation to servicea financial asset by entering into a servicing contract; requires allseparately recognized servicing assets and liabilities to be initially measuredat fair value, if practical; and permits an entity to choose either of thefollowing methods by which it will subsequently measure each class ofseparately recognized servicing assets and liabilities:

1.             *Amortization method* - Amortize theservicing assets or liabilities in proportion to and over the period ofestimated net servicing income or loss and assess servicing assets andliabilities for impairment or increase obligation based on the fair value ateach reporting period.

2.             *Fair value measurement method*- Measureservicing assets or liabilities at fair value at each reporting date and reportchanges in fair value in earnings in the period in which the change occurs.

SFAS No.156 is effective for fiscal years beginning after September 15, 2006.  Earlier adoption is permitted as of thebeginning of an entity’s fiscal year, provided the entity has not yet issuedits financial statements, including interim financial statements, for anyperiod of that fiscal year.  Afteranalyzing the

F-34

----

effectsof the statement, the Company does not believe that the adoption of thisstatement will have a material impact on its results of operations or financialposition.

In June 2006, FASB issued Financial Interpretation No.48 (FIN 48), Accounting for Uncertainty in Income Taxes — an interpretation ofSFAS Statement No. 109. FIN 48 provides guidance on financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. According to the Interpretation, a tax position is recognized ifit is more likely than not that the tax position will be sustained uponexamination, including resolution of any related appeals or litigationprocesses, based on the technical merits of the position. If the tax positionmeets more-likely-than-not recognition threshold, the position is measured todetermine the amount of benefit to recognize and should be measured at thelargest amount of benefit that is greater than 50% likely of being realizedupon ultimate settlement. FIN 48 also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure and transition. The provisions of FIN 48 are effective for fiscalyears beginning after December 15, 2006. The Company does not expect this interpretation to have a materialimpact on the Company’s financial position and/or results of operations.

In September 2006, the Securities and ExchangeCommission (the “SEC’) Staff issued Staff Accounting Bulletin No. 108 (the“SAB”) addressing how the effects of prior-year uncorrected financial statementmisstatements should be considered in current-year financial statements. TheSAB requires registrants to quantify misstatements using both balance-sheet andincome-statement approaches and to evaluate whether either approach results inquantifying an error that is material in light of relative quantitative andqualitative factors. The SAB does not change the SEC staff’s previous guidancein SAB 99 on evaluating the materiality of misstatements.

SAB 108 addresses the mechanics of correctingmisstatements that include the effects from prior years. Additionally, SAB 108requires registrants to apply the new guidance for the first time that itidentifies material errors in existence at the beginning of the first fiscalyear ending after November 15, 2006 by correcting those errors through aone-time cumulative effect adjustment to beginning-of-year retained earnings.The Company adopted this statement and there was no effect on its results ofoperations or financial position.

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurement.  This statementdefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue measurements.  This statementapplies under other accounting pronouncements that require or permit fair valuemeasurements, the Board having previously concluded in those accountingpronouncements that fair value is the relevant measurement attribute.  Accordingly, this statement does not requireany new fair value measurements.

SFAS No. 157 is effective for fiscal years beginningafter November 15, 2007.  Earlieradoption is encouraged, provided that the reporting entity has not yet issuedfinancial statements for that fiscal year, including financial statements foran interim period within that fiscal year. The Company is evaluating this statement and has not yet determined theimpact on its results of operations or financial position, if any.

InSeptember 2006, the FASB issued SFAS No. 158, “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans.”  This Statement improves financial reportingby requiring an employer to recognize the overfunded or underfunded status of adefined benefit postretirement plan as an asset or liability in its statementof financial position and to recognize changes in that funded status in theyear in which the changes occur through comprehensive income.  This Statement also improves the financialreporting by requiring an employer to measure the funded status of a plan as ofthe date of its

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year-endstatement of financial position, with limited exceptions.

Therequired date of adoption of the recognition and disclosure provisions of thisStatement for an employer that is an issuer of publicly traded equity, such asFox Chase Bancorp, Inc., is as of the end of the fiscal year ended afterDecember 15, 2006.  Retrospectiveapplication of this Statement is not permitted.   The Company adopted this statement in thelast quarter of 2006.

The FASB hasrecently approved the Emerging Issues Task Force (“EITF”) Issue No. 06-4, “Accountingfor Deferred Compensation and Postretirement Benefit Aspects of EndorsementSplit-Dollar Life Insurance Arrangements.” In this issue, the EITF concluded that an endorsement split dollar lifeinsurance policy does not effectively settle an employer’s obligation toprovide the post retirement benefit that the policy was designed toprovide.  Therefore, some current expenserecognition may need to be made for any endorsement split dollar plans withpost retirement benefits.

This guidanceapplies to all post retirement endorsement split dollar arrangements.  This will not impact split dollar plans thatonly provide pre-retirement death benefits.

The accrual forthe liability would be calculated in one of two ways:

·                  the actuarialpresent value of the future death benefit or

·                  thecost of insurance of the policy during the postretirement period.

Compliancewith this EITF must be applied to fiscal years beginning after December 15,2007 (January 1, 2008 for calendar year entities).  It can be made through a cumulative—effectadjustment to retained earnings in the year of adoption or as a change inaccounting principles through retrospective application to all priorperiods.  The Company has not determinedif this Statement will have a material impact on its consolidated financialstatements upon adoption.

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities—Including an Amendment of FASBStatement No. 115 (SFAS 159).” SFAS 159 permits entities to choose to measuremany financial instruments and certain other items at fair value and amendsSFAS 115 to, among other things, require certain disclosures for amounts forwhich the fair value option is applied. Additionally, this Statement provides that an entity may reclassifyheld-to-maturity and available-for-sale securities to the trading account whenthe fair value option is elected for such securities, without calling intoquestion the intent to hold other securities to maturity in the future.  This Statement iseffective as of thebeginning of an entity’s first fiscal year that begins after November 15, 2007.Early adoption is permitted as of the beginning of a fiscal year that begins onor before November 15, 2007, provided the entity also elects to apply theprovisions of SFAS 157.  The Company hasnot completed its assessment of SFAS No. 159 and the impact, if any, on itsconsolidated financial statements.

At its September2006 meeting, the EITF reached a final consensus on Issue 06-05, “**Accounting for Purchasesof Life Insurance — Determining the Amount That Could be Realized in Accordancewith FASB Technical Bulletin No. 85-4***.*” Issue 06-05 concludes that indetermining the amount that could be realized under an insurance contractaccounted for under FASB Technical Bulletin No. 85-4, “**Accounting for Purchasesof Life Insurance***,*”the policyholder should (1) consider any additional amounts included in thecontractual terms of the policy; and (2) assume the surrender value on aindividual-life by individual-life policy basis.  Issue 06-05 should be adopted througheither (1) a change

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in accountingprinciple through a cumulative-effect adjustment to retained earnings asof the beginning of the year of adoption or (2) a change in accountingprinciple through retrospective application to all prior periods. Issue06-05 is effective for fiscal years beginning after December 15, 2006.The application of Issue 06-05 is not expected to have a material effecton the Company’s financial position or results of operations.

**NOTE 17 — SUBSEQUENT EVENTS**

InJanuary 2007, the Company entered into a long term operating lease for officespace in an office building located in Blue Bell, Pennsylvania.  This lease term begins May 1, 2007 and theCompany expects certain operational departments to occupy the space.

Minimum annual rental payments due under this lease are asfollows (in thousands):

| 2007 |   | $   | 172    |   |
|------|--------|-----|--------|--------|
| 2008 |   | 421 |   |
| 2009 |   | 434 |   |
| 2010 |   | 447 |   |
| 2011 |   | 460 |   |
| 2012 |   | 275 |   |

 

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****NOTE 18 — PARENT COMPANY ONLY FINANCIAL STATEMENTS****

****Thefollowing condensed financial statements for Fox Chase Bancorp, Inc. (parentcompany only) reflect the investment in its wholly owned subsidiary, Fox ChaseBank, using the equity method of accounting. ****Due to the timing of the Bank’sreorganization into the mutual holding company form and the completion of theCompany’s initial public offering on September 29, 2006, there are no prioryear operations for Fox Chase Bancorp, Inc.

****CONDENSED BALANCE SHEET****
| ** **                                         | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | **(in thousands)**     | ** ** |
| **ASSETS**                                         |       |                        |       |
| Cash and due  from banks                           |       | $                           | 32         |   |
| Interest-bearing  deposits with banks              |       | 26,283                      |       |
| Total cash and  cash equivalents                   |       | 26,315                      |       |
| Investment in  subsidiary                          |       | 34,652                      |       |
| Deferred tax  asset                                |       | 510                         |       |
| ESOP loan                                          |       | 5,232                       |       |
|                                               |       |                        |       |
| **Total  Assets**                                  |       | $                           | 66,709     |   |
| ** **                                         |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**     |       |                        |       |
| Due to  subsidiary                                 |       | 152                         |       |
| Other  liabilities                                 |       | 68                          |       |
| **Total  Liabilities**                             |       | 220                         |       |
| ** **                                         |       |                        |       |
| **Stockholders’  Equity**                     |       | 66,489                      |       |
| ** **                                         |       |                        |       |
| **Total Liability and  Stockholders’ Equity** |       | $                           | 66,709     |   |

**** ****

 

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**CONDENSED STATEMENT OF OPERATIONS**

|                                                                                            | ** ** | **For the**        | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                 | ** ** | **Year Ended**     | ** ** |
| ** **                                                                                 | ** ** | **December 31,**   | ** ** |
| ** **                                                                                 | ** ** | **2006**                | ** ** |
| ** **                                                                                 | ** ** | **(in thousands)** | ** ** |
| **INCOME**                                                                                 |       |                    |       |
| Interest on  deposits with banks                                                           |       | $                       | 105        |   |
| Interest on ESOP  loan                                                                     |       | 121                     |       |
| **Total  Income**                                                                          |       | 226                     |       |
| ** **                                                                                 |       |                    |       |
| **EXPENSES**                                                                               | ** ** | ** **              | ** ** |
| Contribution to charitable  foundation                                                     |       | 1,500                   |       |
| Other expenses                                                                             |       | 273                     |       |
| **Total  Expenses**                                                                        |       | 1,773                   |       |
| ** **                                                                                 |       |                    |       |
| **Loss before income tax benefit and  equity in undistributed net earnings of subsidiary** |       | (1,547                  | )          |
| Income tax benefit                                                                         |       | (529                    | )          |
| **Loss before equity in  undistributed net earnings of subsidiary**                        |       | (1,018                  | )          |
| ** **                                                                                 |       |                    |       |
| Equity in undistributed  net earnings of subsidiary                                        |       | 4,652                   |       |
|                                                                                       |       |                    |       |
| **Net Income**                                                                             |       | $                       | 3,634      |   |

 

 

F-39

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**CONDENSEDSTATEMENT OF CASH FLOWS**

| **CASH FLOWS FROM OPERATING ACTIVITIES**                                           | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|
| Net income                                                                         |       | $          | 3,634      |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |       |       |
| Equity in undistributed  earnings of subsidiary                                    |       | (4,652     | )          |
| Contribution to  charitable foundation                                             |       | 1,349      |       |
| Deferred income taxes                                                              |       | (510       | )          |
| Increase in other  liabilities                                                     |       | 220        |       |
| **Net  Cash Provided by Operating Activities**                                     |       | 41         |       |
| ** **                                                                         |       |       |       |
| **CASH FLOWS FROM INVESTING  ACTIVITIES**                                          | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | ** ** | ** ** |
| Issuance of ESOP loan                                                              |       | (5,755     | )          |
| Loan payment received  on ESOP loan                                                |       | 523        |       |
| Capital contribution to  subsidiary                                                |       | (30,000    | )          |
| **Net  Cash Provided in Investing Activities**                                     |       | (35,232    | )          |
| ** **                                                                         |       |       |       |
| **CASH FLOWS FROM FINANCING  ACTIVITIES**                                          | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | ** ** | ** ** |
| Common stock issued in  conversion                                                 |       | 147        |       |
| Proceeds from stock  offering, net                                                 |       | 61,359     |       |
| **Net  Cash Provided by Financing Activities**                                     |       | $          | 61,506     |   |
| ** **                                                                         |       |       |       |
| **Net  Increase in Cash and Cash Equivalents**                                     |       | 26,315     |       |
| ** **                                                                         |       |       |       |
| **Cash and Cash Equivalents -  Beginning**                                         |       | —     |       |
| ** **                                                                         |       |       |       |
| **Cash and Cash Equivalents - Ending**                                             |       | $          | 26,315     |   |

**** ****

 

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****NOTE 19 — QUARTERLY FINANCIAL DATA (UNAUDITED)****

Thefollowing represents summarized quarterly financial data of Fox Chase Bancorp,Inc, which, in the opinion of management, reflects all adjustments (comprisingonly normal recurring accruals) necessary for a fair presentation.
| **Three Months Ended**                  | ** ** | **12/31/06**                                                       | ** ** | **9/30/06** | ** ** | **6/30/06** | ** ** | **3/31/06** | ** ** | **12/31/05** | ** ** | **9/30/05** | ** ** | **6/30/05** | ** ** | **3/31/05** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|--------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                        | ** ** | **(in thousands, except per share data)** | ** ** |
| Interest income                                   |       | $                                                                  | 10,181     |        | $          | 9,106       |       | $           | 9,007      |         | $          | 8,883       |       | $           | 8,829      |        | $          | 8,808 |   | $ | 9,775 |   | $ | 10,189 |   |
| Interest expense                                  |       | 5,321                                                              |       | 5,228       |       | 5,059       |       | 4,851       |       | 5,069        |       | 5,230       |       | 5,180       |       | 5,218       |       |
| Net interest income                               |       | 4,860                                                              |       | 3,878       |       | 3,948       |       | 4,032       |       | 3,760        |       | 3,578       |       | 4,595       |       | 4,971       |       |
| Credit for loan losses                            |       | (2,233                                                             | )          | (2,778      | )          | (383        | )          | —      |       | (4,000       | )          | (2,000      | )          | (25         | )          | —      |       |
| Net interest income  after credit for loan losses |       | 7,093                                                              |       | 6,656       |       | 4,331       |       | 4,032       |       | 7,760        |       | 5,578       |       | 4,620       |       | 4,971       |       |
| Noninterest income                                |       | 621                                                                |       | 436         |       | 588         |       | 428         |       | (303         | )          | 445         |       | 628         |       | 444         |       |
| Noninterest expense                               |       | 5,289                                                              |       | 5,706       |       | 4,686       |       | 4,186       |       | 4,111        |       | 4,257       |       | 3,052       |       | 3,788       |       |
| Income before taxes                               |       | 2,425                                                              |       | 1,386       |       | 233         |       | 274         |       | 3,346        |       | 1,766       |       | 2,196       |       | 1,627       |       |
| Income tax provision  (benefit)                   |       | 410                                                                |       | 365         |       | (97         | )          | 6           |       | 1,373        |       | 502         |       | 640         |       | 460         |       |
| Net income                                        |       | $                                                                  | 2,015      |        | $          | 1,021       |       | $           | 330        |         | $          | 268         |       | $           | 1,973      |        | $          | 1,264 |   | $ | 1,556 |   | $ | 1,167 |   |
|                                              |       |                                                               |       |        |       |        |       |        |       |         |       |        |       |        |       |        |       |
| Per Common Share Data (1)                         |       |                                                               |       |        |       |        |       |        |       |         |       |        |       |        |       |        |       |
| Weighted average common  shares — diluted    |       | 14,117,509                                                         |       | —      |       | —      |       | —      |       | —       |       | —      |       | —      |       | —      |       |
| Weighted average common  shares — basic      |       | 14,080,564                                                         |       | —      |       | —      |       | —      |       | —       |       | —      |       | —      |       | —      |       |
| Net income per share —  diluted              |       | $                                                                  | 0.14       |        | —     |        | —     |        | —     |         | —     |        | —     |        | —     |        | —     |   |
| Net income per share — basic                 |       | $                                                                  | 0.14       |        | —     |        | —     |        | —     |         | —     |        | —     |        | —     |        | —     |   |

 

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(1)Due to the timing of the Bank’s reorganization intothe mutual holding company form and the completion of the Company’s initialpublic offering on September 29, 2006, earnings per share for the periods shownother than the three months ended December 31, 2006 are not consideredmeaningful or are not applicable.

 

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.
| .                    |   | FOX CHASE BANCORP, INC |
|----------------------|--------|------------------------|
|                 |   |                   |
| Date: March 28, 2007 |   | By:                    | /s/ Thomas M.  Petro |
|                 |   |                   | Thomas M. Petro |
|                 |   |                   | President and  Chief Executive Officer |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the following personson behalf of the registrant and in the capacities and on the dates indicated.
| Name                         | ** ** | **Title**                          | ** ** | **Date**       |
|------------------------------|------------|------------------------------------|------------|----------------|
|                         |       |                               |       |           |
| /s/ Thomas M.  Petro         |       | President, Chief Executive Officer |       | March 28, 2007 |
| Thomas M. Petro              |       | and Director                       |       |           |
|                         |       | (principal executive officer)      |       |           |
|                         |       |                               |       |           |
| /s/ Jerry D.  Holbrook       |       | Chief Financial Officer and        |       | March 28, 2007 |
| Jerry D. Holbrook            |       | Secretary                          |       |           |
|                         |       | (principal accounting and          |       |           |
|                         |       | financial officer)                 |       |           |
|                         |       |                               |       |           |
| /s/ Roger H.  Ballou         |       | Director                           |       | March 28, 2007 |
| Roger H. Ballou              |       |                               |       |           |
|                         |       |                               |       |           |
| /s/ Richard E.  Bauer        |       | Director                           |       | March 28, 2007 |
| Richard E. Bauer             |       |                               |       |           |
|                         |       |                               |       |           |
| /s/ Todd S.  Benning         |       | Director                           |       | March 28, 2007 |
| Todd S. Benning              |       |                               |       |           |
|                         |       |                               |       |           |
| /s/ Richard M.  Eisenstaedt  |       | Director                           |       | March 28, 2007 |
| Richard M. Eisenstaedt       |       |                               |       |           |
|                         |       |                               |       |           |
| /s/ Laura M.  Mercuri        |       | Director                           |       | March 28, 2007 |
| Laura M. Mercuri             |       |                               |       |           |
|                         |       |                               |       |           |
| /s/ Anthony A.  Nichols, Sr. |       | Director                           |       | March 28, 2007 |
| Anthony A. Nichols, Sr.      |       |                               |       |           |
|                         |       |                               |       |           |
| /s/ Peter A.  Sears          |       | Director                           |       | March 28, 2007 |
| Peter A. Sears               |       |                               |       |           |

 

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