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**UNITED STATES**

###### **SECURITIES AND EXCHANGECOMMISSION**

**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, 2008** |
| **OR**     |
|       |                                                                                                                                                                                                                                                                                                                                                 |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                                                                                             |
|       |                                                                                                                                                                                                                                                                                                                                                 |
| ** ** | **For the transition period from                            to                          ** |
|            |                                                                                                                                                                                                                                                                                                                                                      |  |  |

 

**CommissionFile Number: 001-32971**

 

**FOX CHASE BANCORP, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 
|   | Registrant’s telephone  number, including area code: **(215) 682-7400** |
|--------|------------------------------------------------------------------------------|
|   |                                                                         |
|   | Securities registered  pursuant 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**                  |

 

Securitiesregistered pursuant to Section 12(g) of the Act: **None**

 

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes oNo x

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act.

Yes o No x

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes xNo o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definition of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  (Check one):

 

| Large  Accelerated Filer o                     |   | Accelerated  Filer x         |
|------------------------------------------------|--------|------------------------------|
| Non-Accelerated Filer o                        |   | Smaller Reporting  Company o |
| (Do not check if a  smaller reporting company) |

 

Indicate by check markwhether the registrant is a shell company (as defined by Rule 12b-2 of theExchange Act).  Yes oNo x

 

The aggregate market value of the voting andnon-voting common equity held by nonaffiliates as of June 30, 2008 wasapproximately $57.9 million.  Solely forpurposes of this calculation, the shares held by Fox Chase MHC and thedirectors and officers of the registrant are deemed to be affiliates.

 

The number of shares outstanding of the registrant’scommon stock as of March 10, 2009 was 13,990,350.

# ** **

# **DOCUMENTS INCORPORATED BY REFERENCE**

 

# **Portions of the ProxyStatement for the 2009 Annual Meeting of Stockholders are incorporated byreference in Part III of this Form 10-K.**

# ** **

 

 

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# **INDEX**

 
|       |                                                                                                               |   | **Page**   |
|------------|--------------------------------------------------------------------------------------------------------------------|--------|------------|
|       | **Part I**                                                                                                    |   | ** ** |
|       |                                                                                                               |   |       |
| Item 1.    | Business                                                                                                           |   | 1          |
| Item 1A.   | Risk Factors                                                                                                       |   | 18         |
| Item 1B.   | Unresolved Staff Comments                                                                                          |   | 24         |
| Item 2.    | Properties                                                                                                         |   | 25         |
| Item 3.    | Legal Proceedings                                                                                                  |   | 26         |
| Item 4.    | Submission of Matters to a Vote of Security  Holders                                                               |   | 26         |
|       |                                                                                                               |   |       |
|       | **Part II**                                                                                                   |   |       |
|       |                                                                                                               |   |       |
| Item 5.    | Market for Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities |   | 26         |
| Item 6.    | Selected Financial Data                                                                                            |   | 29         |
| Item 7.    | Management’s Discussion and Analysis of  Financial Condition and Results of Operation                         |   | 31         |
| Item 7A.   | Quantitative  and Qualitative Disclosures About Market Risk                                                        |   | 59         |
| Item 8.    | Financial  Statements and Supplementary Data                                                                       |   | 59         |
| Item 9.    | Changes in  and Disagreements With Accountants on Accounting and Financial Disclosure                              |   | 60         |
| Item 9A.   | Controls and Procedures                                                                                            |   | 60         |
| Item 9B.   | Other Information                                                                                                  |   | 60         |
|       |                                                                                                               |   |       |
|       | **Part III**                                                                                                  |   |       |
|       |                                                                                                               |   |       |
| Item 10.   | Directors, Executive Officers and  Corporate Governance                                                            |   | 60         |
| Item 11.   | Executive Compensation                                                                                             |   | 61         |
| Item 12.   | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters                    |   | 62         |
| Item 13.   | Certain Relationships and Related  Transactions and Director Independence                                          |   | 62         |
| Item 14.   | Principal Accountant Fees and Services                                                                             |   | 63         |
|       |                                                                                                               |   |       |
|       | **Part IV**                                                                                                   |   |       |
|       |                                                                                                               |   |       |
| Item 15.   | Exhibits and Financial Statement  Schedules                                                                        |   | 63         |
|       |                                                                                                               |   |       |
| SIGNATURES |                                                                                                               |   |

 

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*Thisannual report contains forward-looking statements that are based on assumptionsand may describe future plans, strategies and expectations of Fox Chase Bancorp, Inc.  These forward-looking statements are generallyidentified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,”“project” or similar expressions. Fox Chase Bancorp, Inc.’s ability topredict results or the actual effect of future plans or strategies isinherently uncertain. Factors which could have a material adverse effect on theoperations of Fox Chase Bancorp, Inc. and its subsidiary include, but arenot limited to, changes in interest rates, national and regional economicconditions, legislative and regulatory changes, monetary and fiscal policies ofthe U.S. government, including policies of the U.S. Treasury and the FederalReserve Board, the quality and composition of the loan or investmentportfolios, deposit flows, competition, demand for loan products, and for financialservices in Fox Chase Bancorp, Inc.’s market area, changes in real estatemarket values in Fox Chase Bancorp, Inc.’s market area, changes inrelevant 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.”*

 

*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. doesnot undertake, and specifically disclaims any obligation, to release publiclythe result of any revisions that may be made to any forward-looking statementsto reflect events or circumstances after the date of the statements or toreflect the occurrence of anticipated or unanticipated events.*

 

*Unless the context indicates otherwise, allreferences in this annual report to “Company,” “we,” “us” and “our” refer to FoxChase Bancorp, Inc. and its subsidiaries.*

 

**PART I**

 

**Item 1.    BUSINESS**

 

**General**

 

Fox Chase Bancorp, Inc.was organized on September 29,2006 under the laws of the United States to be a holding company for Fox ChaseBank (the “Bank”), a stock savings bank also organized under the laws of theUnited States.  On September 29,2006, the Company completed its initial public offering in which it sold6,395,835 shares, or 43.57%, of its common stock to the public, including575,446 shares to 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’sfederally chartered mutual holding company. Additionally, Fox Chase Bancorp contributed $150,000 in cash and issued135,000 shares, or 0.92% of its outstanding common stock, to the Fox Chase BankCharitable Foundation.

 

Fox Chase Bancorp’s business activities are theownership of Fox Chase Bank’s capital stock and the management of the offeringproceeds it retained.  Fox Chase Bancorpdoes not own or lease any property. Instead, it uses the premises, equipment and other property of Fox ChaseBank.  Accordingly, the information setforth in this annual report, including the consolidated financial statementsand related financial data, relates primarily to Fox Chase Bank.  As a federally chartered savings and loanholding company, Fox Chase Bancorp is subject to the regulation of the Officeof Thrift Supervision.

 

On September 29, 2006, Fox Chase Bank convertedfrom the mutual to the mutual holding company form of organization.  Fox Chase Bank operates as acommunity-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 realestate, multi-family and commercial real estate, construction, commercial andconsumer loans, which Fox Chase Bank generally 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 up toapplicable legal limits under the Deposit Insurance Fund administered by theFederal Deposit Insurance Corporation. Fox Chase Bank is also a member of the Federal Home Loan Bank ofPittsburgh.

 

Fox Chase Bank’s website address is www.foxchasebank.com.  Information on our website should not beconsidered a part of this annual report.

 

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**MarketAreas**

 

We are headquartered in Hatboro, Pennsylvania, whichis approximately fifteen miles north of Center City, Philadelphia.  We maintain two offices in Montgomery County,Pennsylvania, one office in each of Philadelphia, Chester and DelawareCounties, Pennsylvania and three offices in Bucks County, Pennsylvania.  All eight of these branch offices are in thePhiladelphia-Camden-Wilmington metropolitan statistical area.  We maintain three offices in the southern NewJersey shore area, one in Atlantic County and two in Cape May County, NewJersey.

 

***Philadelphia Market Area.***  The economy of our Philadelphia market areais primarily dominated by the service sector. According to published statistics, the population of the five-countyarea served by our branches totaled approximately 3.9 million in 2008.  The economy in the Philadelphia market areacontains a highly-educated workforce and a diverse local economy as traditionalemployers in the manufacturing and financial services industry have beenbolstered by growth in the life sciences and health care industries as well asthe information technology and communication sectors.  The median household and per capita income inBucks, Chester, Delaware and Montgomery Counties significantly exceeds thecomparable figures for Pennsylvania as a whole, while the median household andper capita income in Philadelphia County trailed the comparable figures forPennsylvania.

 

***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 Cape May Countyis primarily geared towards tourism. According to published statistics, Atlantic County’s population in 2008was approximately 271,000 and Cape May County’s population wasapproximately 96,000.  The economy inAtlantic County, while strong in recent years as new and expanding casinos inAtlantic City were being developed, began deteriorating as gaming revenues fellin 2008.   Cape May County alsogenerally benefits from the growth in and around Atlantic City, as manyresidents commute to that area for employment. Although the economy in this market area has been strong in recentyears, during 2008 gaming revenues and casino development has declined,resulting in a significant deterioration in development and employment.  Additionally, median household and per capitaincome in Atlantic and Cape May Counties are lower than the comparablefigures for New Jersey as a whole.  Also,the Southern New Jersey market is located outside of a major metropolitan area,resulting in lower average income levels and a smaller portion of higher-paying,professional jobs.

 

**Competition**

 

We face significant competition for the attraction ofdeposits and origination of loans.  Ourmost direct competition for deposits has historically come from the numerousfinancial institutions operating in our market areas and, to a lesser extent,from other financial service companies such as brokerage firms, credit unionsand insurance companies.  We also facecompetition for investors’ funds from money market funds, mutual funds andother corporate and government securities. At June 30, 2008, which is the most recent date for which data isavailable from the Federal Deposit Insurance Corporation, we held approximately0.20% of the deposits in the Philadelphia-Camden-Wilmington metropolitanstatistical area, which was the 40th largest market share out of the 162 financialinstitutions with offices in that metropolitan statistical area. In addition,at June 30, 2008, we held approximately 0.95% of the deposits in Atlanticand Cape May Counties, which was the 15th largest market share out of the 21 financialinstitutions with offices in those counties. In addition, larger banks such asBank of America, Wells Fargo (formerly Wachovia), Sovereign Bank, Citizens Bankof PA and TD Banknorth also operate in our market areas.  These institutions are significantly largerthan us and, therefore, have greater resources.

 

Our competition for loans comes primarily fromfinancial institutions in our market areas, and, to a lesser extent, from otherfinancial service providers such as mortgage companies and mortgagebrokers.  Competition for loans alsocomes from non-depository financial service companies entering the mortgage andcommercial lending markets such as insurance companies, securities companiesand specialty finance companies.

 

We expect competition to increase in the future as aresult of legislative, regulatory and technological changes and the continuingtrend of consolidation in the financial services industry.  Technological advances, for example, havelowered the barriers to market entry, allowed banks and other lenders to expandtheir geographic reach by providing services over the Internet and made itpossible for non-depository institutions to offer products and services thattraditionally have been provided by banks. Changes in federal law permit affiliation among banks, securities firmsand insurance companies, which promotes a competitive environment in thefinancial services industry.  Competitionfor deposits and the origination of loans could limit our future growth.

 

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**LendingActivities**

 

***General.***  We generally originate loans forinvestment.  The largest segments of ourloan portfolio are one- to four-family residential real estate loans,multi-family and commercial real estate loans, construction loans, commercialand consumer loans.  Historically, weoriginated very little multi-family and commercial real estate loans, constructionloans or commercial loans.  However, in2003, then-current management determined to emphasize multi-family andcommercial real estate lending and construction lending, primarily in thesouthern New Jersey shore area where the Bank had opened branch offices.  Then-current management did not have a highlevel of expertise in these types of lending, were relatively unfamiliar withthe market area, and did not obtain the proper documentation on these types ofloans.  Accordingly, many of these loanswere criticized or classified in accordance with regulatory guidelines.  In 2005, the Bank’s current management ceasedoriginating these loans and made significant efforts to reduce the levels ofthese types of loans made by former management from the portfolio.  In 2005 and 2006, we hired senior managementand lenders with significant commercial lending experience and adopted newcommercial credit policies.  Since thattime, we have been originating and servicing a growing number of multi-familyand commercial real estate and construction loans to individuals andbusinesses.  Such loans are generallylocated in our primary market areas in the Mid-Atlantic region of the U.S.

 

***One- to Four-Family Residential Real Estate Loans*.**  The largest segment of our loan portfoliocontinues to be mortgage loans, which enable borrowers to purchase or refinanceexisting homes, most of which are owner occupied.  We offer fixed-rate and adjustable-rate loans****with terms of up to 30 years.  Borrower demand for adjustable-rate loansversus fixed-rate loans is a function of the current and expected future levelof 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.  The loan fees, interest rates and otherprovisions of mortgage loans are determined by us on the basis of our ownpricing criteria and competitive market conditions.  Most of our loan originations result fromrelationships with existing or past customers, members of our local communityand referrals. During 2007, the Bank also began originating loans referred byPhiladelphia Mortgage Advisors, Inc., a mortgage banker in which the Bankhad a 20% investment.  The ability tooriginate loans through this correspondent allows the Bank to continue to offerone-to four-family mortgage loans to a growing and diverse set of customersthrough additional distribution channels in a cost-effective manner.  In February 2009, the Bank increased itsownership interest in Philadelphia Mortgage Advisors, Inc., toapproximately 45%.

 

While one- to four-family residential real estateloans are normally originated with terms of up to 30 years, such loanstypically remain outstanding for substantially shorter periods becauseborrowers often prepay their loans in full upon sale of the property pledged assecurity or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors,the level of purchase and sale activity in the real estate market, prevailinginterest rates and the interest rates payable on outstanding loans.

 

Interest rates and payments on our adjustable-ratemortgage loans generally adjust annually after an initial fixed period of one,three or five years.  Interest rates andpayments on these adjustable-rate loans generally are based on the one-yearconstant maturity Treasury index.  Themaximum amount by which the interest rate may be increased is generally twopercentage points per adjustment period with a lifetime interest rate cap ofsix percentage points over the initial interest rate of the loan.

 

Historically, we generally did not make conventionalloans with loan-to-value ratios exceeding 95% at the time the loan isoriginated.  During 2008, the Bank beganlimiting its loan-to-value limits on certain loans due to deteriorating economicconditions and declining home values.  AtDecember 31, 2008, only $1.5 million, or 0.57%, of our residential loans,had a loan-to-value ratio exceeding 90% of the loan.  Private mortgage insurance is generallyrequired for all mortgage loans with loan-to-value ratios in excess of80%.  We require properties securingmortgage loans to be appraised by a Board-approved independent appraiser.  We generally require title insurance on allfirst mortgage loans.  Borrowers mustobtain hazard insurance, and flood insurance for loans on properties located ina flood zone, before closing the loan.

 

In an effort to provide financing for low- andmoderate-income and first-time homebuyers, we offer a special homebuyersprogram to qualified individuals.  Weoriginate the loans using reduced interest rates, fees and more flexible loanconditions.

 

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***Multi-Family and Commercial Real Estate Loans*.**  We offer fixed-rate and adjustable-ratemortgage loans secured by multi-family and commercial real estate toindividuals and small businesses in our primary market areas.  Our multi-family and commercial real estateloans are generally secured by condominiums, apartment buildings and mixed-useproperties with residential units, as well as office and retail space.  While we have focused on increasing thissegment of our loan portfolio over the last several years, we have become moreselective in the types of properties and projects securing such loans.

 

These loans are typically repaid or the term extendedbefore maturity, in which case a new rate is negotiated to meet marketconditions and an extension of the loan is executed for a new term with a newamortization schedule.  We originatemulti-family and commercial real estate loans with terms of up to 20years.  Interest rates and payments onour adjustable-rate loans generally are based on the prime interest rate,although our policies permit interest rates to be based on the ConstantMaturity Treasury Index, LIBOR or the federal funds rate.  Loans are secured by first mortgages thatgenerally 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, 2008, our largest outstandingmulti-family or commercial real estate loan had an outstanding balance of $9.7million and was secured by a hotel in southern New Jersey.  This loan was performing in accordance withits contractual terms at December 31, 2008.

 

***Construction Loans.***  We originate fixed-rate and adjustable-rateloans to individuals, builders and developers to finance the construction ofresidential dwellings.  ** **We also makeconstruction loans for commercial development projects, including apartmentbuildings, restaurants, shopping centers and other owner-occupied propertiesused for businesses.  Our constructionloans generally provide for the payment or reserving of interest only duringthe construction phase, which are usually six to twelve months for residentialproperties and eighteen months or more for commercial properties.  At the end of the construction phase, theloan is typically repaid with the proceeds from sales of individual residentialunits or is converted to a permanent mortgage loan.  Loans generally can be made with a maximumloan-to-value ratio of 80% at the time the loan is originated.  Before making a commitment to fund aconstruction loan, we require an appraisal of the property by an independentlicensed appraiser.  We also generallyrequire an inspection of the property before disbursement of funds during theterm of the construction loan.

 

We also originate loans secured by undeveloped anddeveloped land.  The terms and rates ofour land loans are the same as our multi-family and commercial real estateloans.  Loans secured by undeveloped landor improved lots generally involve greater risks than residential mortgagelending because land loans are more difficult to evaluate.  If the estimate of value proves to beinaccurate, in the event of default and foreclosure, we may be confronted witha property the value which is insufficient to assure full repayment.  Loan amounts generally do not exceed 75% ofthe lesser of the appraised value or the purchase price.

 

At December 31, 2008, our largest residentialconstruction loan was an eight-home residential development located in WildwoodCrest, New Jersey to which the Bank has committed $9.4 million, of which $6.8million was outstanding.  At December 31,2008, our largest outstanding commercial construction loan was for $10.0million, of which $400,000 was outstanding. This loan is secured by land and improvements to develop a 120-unitapartment complex near Harrisburg, Pennsylvania.  Both loans were performing in accordance withtheir terms at December 31, 2008.

 

***Commercial Loans.***  We also offer commercial business loans toprofessionals, sole proprietorships and small businesses in our marketarea.  The Bank also occasionallypurchases loan participations from other institutions to utilize excess capitaland liquidity when we believe that such investments will provide an appropriatereturn. The maximum amount of our commercial loans is limited by ourin-house-loans-to one borrower limit.  Weintend to grow this segment of our loan portfolio.

 

We offer secured commercial term loans, which have amaturity of greater than one year and the payment of which is dependent onfuture earnings.  The term for repaymentof the loan will normally be limited to the lesser of the expected useful lifeof the asset being financed or a fixed amount of time, generally less thanseven years.  We also offer revolvinglines of credit secured by business assets other than real estate, such asbusiness equipment, inventory and accounts receivable, letters of credit anddemand loans.  We originate these loanson both a fixed-rate 

 

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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 originate commercial lines of credit tofinance the working capital needs of businesses to be repaid by seasonal cashflows or to provide a period of time during which the business can borrow fundsfor planned equipment purchases. Commercial lines of credit can be fixed-rate or adjustable-rateloans.  Commercial lines of creditsecured by commercial real estate generally have a term of less than sevenyears.

 

When making commercial business loans, we consider thefinancial statements and/or tax returns of the borrower, the borrower’s paymenthistory of both corporate and personal debt, the debt service capabilities ofthe borrower, the projected cash flows of the business, the viability of theindustry in which the customer operates, the value of the collateral and ourassessment of management’s ability. Commercial business loans are generally secured by a variety ofcollateral, primarily accounts receivable, inventory and equipment, and aregenerally supported by personal guarantees. Depending on the collateral used to secure the loans, commercial loansare made in amounts of up to 80% of the value of the collateral securing theloan (90% for established borrowers pledging new equipment).  We generally do not make unsecured commercialloans.

 

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

 

The procedures for underwriting consumer loans includean assessment of the applicant’s payment history on other debts and ability tomeet existing obligations and payments on the proposed loan.  Although the applicant’s creditworthiness isa primary consideration, the underwriting process also includes a comparison ofthe value of the collateral, if any, to the proposed loan amount.

 

We generally offer fixed-rate home equity loans with amaximum combined loan-to-value ratio of 90% and adjustable-rate lines of creditwith a maximum combined loan-to-value ratio of 80%.  We recently reduced the maximum loan-to-valuefrom 90% to 80% on fixed-rate consumer loans. 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 20years.  Interest rates on these linestypically adjust monthly.  We offerfixed-rate and adjustable-rate home equity loans.  Home equity loans have terms that range fromone to 15 years.  We hold a first orsecond mortgage position on most of the homes that secure our home equity loansand home equity lines of credit.

 

We also provide a consumer loan product under which wewill originate a fixed-rate or adjustable-rate loan on an owner-occupied one-to four-family residence, with a loan-to-value ratio of 80% of the securedproperty.  We will then originate a homeequity loan with a loan-to-value ratio of either 10% or 15% of the securedproperty.  The remaining 10% or 5% mustbe paid in cash by the borrower.  Thisproduct, sometimes referred to as combination financing or a piggyback loan,eliminates the need for private mortgage insurance.  However, to obtain this product, the borrowermust meet more rigorous underwriting criteria with respect to the one- tofour-family residential real estate loan and home equity loan.  During 2007, we adopted more stringentunderwriting criteria for such loans and in 2008 further tightened thesecriteria to address current economic conditions.

 

We offer loans secured by new and usedautomobiles.  These loans have fixedinterest rates and generally have terms up to six years.  We will generally offer automobile loans witha maximum loan-to-value ratio of 90% of the purchase price of the vehicle.

 

We also offer unsecured overdraft lines of credit toour retail customers for overdraft protection. These lines range between $500 and $7,500 and the rate and amounts areoffered to customers in relation to their individual credit history.  At December 31, 2008 we had 231 suchloans totaling $221,000.

 

We offer consumer loans secured by certificates ofdeposit held at Fox Chase Bank with fixed interest rates and terms up to fiveyears.  We will offer such loans up to90% of the principal balance of the certificate of deposit. For moreinformation on our loan commitments, see Item 7, *“Management’s Discussion and Analysis of Financial Condition andResults of Operations—Risk Management—Liquidity Management.”*

 

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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 estateloans to adverse conditions in the real estate market or the economy. Tomonitor cash flows on income properties, we generally require borrowers andloan guarantors to provide annual financial statements and/or tax returns.  In reaching a decision on whether to make amulti-family or commercial real estate loan, we consider the net operatingincome of the property, the borrower’s expertise, credit history and profitabilityand the value of the underlying property. We have generally required that the properties securing these realestate loans have debt service coverage ratios (the ratio of earnings beforedebt service to debt service) of at least 1.20x.  Environmental screens, surveys andinspections are obtained when circumstances suggest the possibility of thepresence of hazardous materials. Further, in connection with our ongoing monitoring of the loan, wetypically will review the property, the underlying loan and guarantorsannually.

 

***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, the estimatedcost (including interest) of construction and the ability of the project to besold upon completion.  During theconstruction phase, a number of factors could result in delays and costoverruns.  If the estimate ofconstruction costs proves to be inaccurate, we may be required to advance fundsbeyond the amount originally committed to permit completion of thebuilding.  If the estimate of value provesto be inaccurate, we may be confronted, at or before the maturity of the loan,with a building having a value which is insufficient to assure fullrepayment.  If we are forced to forecloseon a building before or at completion due to a default, there can be noassurance that we will be able to recover all of the unpaid balance of, andaccrued 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, any collateralsecuring such loans may depreciate over time, may be difficult to appraise andmay fluctuate in value.

 

***Consumer Loans*. **Consumer loans may entail greater riskthan residential mortgage loans do, 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 further substantialcollection efforts against the borrower. In addition, consumer loan collections depend on the borrower’scontinuing financial stability, and therefore are more likely to be adverselyaffected by job loss, divorce, illness or personal bankruptcy.  Furthermore, the application of variousfederal and state laws, including bankruptcy and insolvency laws, may limit theamount that can be recovered on such loans.

 

***Loan Originations, Sales and Participations*.** Loan originations come from a numberof sources.  The primary source of loanoriginations is existing customers, walk-in traffic, advertising, referralsfrom customers and loans originated by our commercial relationship managers.  We advertise in newspapers that are widelycirculated 

 

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throughout our marketareas.  Accordingly, when our rates arecompetitive, we attract loans throughout our market areas. During 2007, theBank began originating loans through a mortgage banker in which the Bank made a20% investment. In February 2009, the Bank increased its ownershipinterest in this mortgage banker to approximately 45%.

 

At December 31, 2008, we were a participatinglender on 18 loans totaling $26.0 million, which are secured by commercial andresidential real estate, lease payments and the assets of the businesses.  These loans are being serviced by the leadlender.  We expect to continue topurchase participation interests, primarily in commercial loans and commercialreal estate loans, when such opportunities meet the Bank’s investment returnsand risk parameters.  On theseparticipation interests, we generally perform our own underwriting analysisbefore purchasing such loans and therefore believe there would not be a greaterrisk of default on these obligations. However, in a purchased participation loan, we would not service theloan and thus are subject to the policies and practices of the lead lender withregard to monitoring delinquencies, pursuing collections and institutingforeclosure proceedings.  In assessingwhether to participate, we require a review of all of the documentationrelating to any loan in which we participate, including any annual financialstatements provided by a borrower. Additionally, we require periodic updates on the loan from the leadlender.

 

From time to time we willalso sell participation interests in loans where we are the lead lender andservicer.  At December 31, 2008, wewere the lead lender on nine loans totaling $21.2 million, of which the Bankowned $10.2 million and serviced $11.0 million for other banks. We expect inthe future that we will continue to sell participation interests to localfinancial institutions, primarily with respect to construction and commercialreal estate loans that approach or exceed our lending limits or loans that areoutside of our immediate market areas.

 

***Loan Approval Procedures and Authority*.** Our lending activities follow written, non-discriminatory,underwriting standards and loan origination procedures established by our Boardof Directors and management.  The Boardhas granted authority to approve residential and consumer loans up to $300,000to the Assistant Manager of the Consumer Lending Department and up to $450,000to the Vice President of Residential Mortgage Lending and the Vice President ofConsumer Lending.  The Board has grantedindividual authority to approve commercial loans up to $1.5 million to theChief Executive Officer, the Chief Operating Officer, the Chief Credit Officerand the Credit Risk Manager.  Commercialloans between $1.5 million and $2.75 million can be approved based on dualauthority from the previously mentioned officers. Loans in excess of $2.75million and up to $4.5 million require the approval by the Officers LoanCommittee, consisting of the President and Chief Executive Officer, the ChiefOperating Officer, the Chief Credit Officer and other experienced lenders andofficers as appointed by the Board from time to time.  Loans or groups of loans with exposuresbetween $4.5 million and $10.0 million require the approval of the ExecutiveOfficers Loan Committee, consisting of the President and Chief Executive Officer,the Chief Operating Officer, the Chief Credit Officer, the Credit Risk Managerand other senior lending officers of the Bank. Loans greater than $10.0 million are required to be approved by the RiskManagement Committee of the Board of Directors.

 

***Loans to One Borrower*.**   The maximum amount 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, 2008, our generalregulatory limit on loans to one borrower was approximately $15.6 million.  At that date, our largest lendingrelationship was a $10.0 million warehouse line to Philadelphia MortgageAdvisors, Inc., of which $6.5 million was outstanding, secured byindividual mortgage loans.  Our secondlargest lending relationship was a $10.0 million loan, of which $400,000 wasoutstanding, secured by land and improvements to develop a 120-unit apartmentcomplex near Harrisburg, Pennsylvania. Our third largest lending relationship was a $9.7 million loan securedby a hotel in southern New Jersey.  Theseloans were performing according to their terms at December 31, 2008.

 

***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 within 60 days.

 

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**InvestmentActivities**

 

The Board of Directors reviews and approves ourinvestment policy annually.  The RiskManagement Committee of the Board of Directors is responsible for establishingpolicies for conducting investment activities, including the establishment ofrisk limits.  The Risk ManagementCommittee of the Board of Directors reviews investment transactions on amonthly basis and monitors the composition and performance of the investmentportfolio on a quarterly basis.  TheBoard has directed the Chief Financial Officer to implement the investmentpolicy.

 

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

 

1.                                       absorbfunds when loan demand and deposit outflows are low and infuse funds into loanswhen loan demand is high and to fund deposit outflows;

 

2.                                       generatea favorable return on investments;

 

3.                                       provideincome consistent with our liquidity and safety requirements, while providing asuitable balance of quality and diversification to our balance sheet;

 

4.                                       havecollateral available for pledging requirements; and

 

5.                                       providea medium for the implementation of certain interest rate risk managementmeasures intended to establish and maintain an appropriate balance between thesensitivity to changes in interest rates.

 

We have authority toinvest in various types of liquid assets, including U.S. Treasury obligations,securities of various federal and state 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.

 

At December 31,2008, our investment portfolio totaled $294.7 million and consisted primarilyof mortgage-backed securities issued by Fannie Mae, Freddie Mac, Ginnie Maeand, to a lesser extent, mortgage related securities issued by private issuers,securities of state and municipal governments and corporate debt.

 

At December 31, 2008and 2007,  we held a private labelcollateralized mortgage obligation (“CMO”) with an amortized cost of $889,000and $1.2 million, respectively. The CMO had an unrealized loss of $620,000 at December 31,2008 and unrealized gain of $27,000 at December 31, 2007.  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.  Wehave been continuously monitoring this privately issued CMO given the currentcredit cycle to manage the risks associated with this type of security.

 

At December 31, 2008and 2007, we held private label commercial mortgage backed securities (“CMBS”)with an amortized cost of $10.0 million and $10.1 million, respectively.  These securities had an unrealized loss of$2.7 million at December 31, 2008 and unrealized gain of $68,000 at December 31,2007. We have been continuously monitoring these private issued CMBS’ given thecurrent credit cycle to manage the risks associated with these types ofsecurities.

 

Additionally,Federal law requires a member institution of the Federal Home Loan Bank Systemto hold stock of its district Federal Home Loan Bank according to apredetermined formula.  This stock iscarried at cost and was $9.7 million at December 31, 2008, which represented4.75% of advances plus 0.75% of unused borrowing capacity.  During December 2008, the FHLB ofPittsburgh announced that it does not intend to pay a dividend on its commonstock for the foreseeable future. Additionally, the FHLB of Pittsburgh indicated it would not redeem any 

 

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common stock associatedwith member advance repayments and that is may increase its individual memberstock investment requirements. The FHLB of Pittsburgh is permitted to increasethe amount of capital stock owned by a member company to 6.00% of a member’sadvances, plus 1.50% of the unused borrowing capacity.  As of December 31, 2008 the Company’smaximum stock obligation was $14.0 million.

** **

**DepositActivities and Other Sources of Funds**

 

***General*.**  Deposits, other borrowings, repayments onloans and investment securities are the major sources of our funds for lendingand other investment purposes.  Loan andinvestment security repayments are a relatively stable source of funds, whiledeposit flows and loan and mortgage related investment security prepayments aresignificantly influenced by general interest rates and money market conditions.

 

***Deposit Accounts*.**  Substantially all of our depositors areresidents of the Commonwealth of Pennsylvania or the State of New Jersey.  We attract deposits in our market areasthrough advertising and through the offering of 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 deposit.  At December 31, 2008, 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 bi-weekly. Our current strategy is to offer competitive rates and to be in themiddle to upper end of the market for rates on a variety of retail and businessdeposit products.

 

We also offer a varietyof 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. We also offer remote capture products for business customers to meettheir online banking needs. Additionally, we offer sweep accounts and money market accounts forbusinesses.  We are seeking to increaseour commercial deposits through the offering of these types of cash managementproducts.

 

***Borrowings.*** We utilize borrowings fromthe Federal Home Loan Bank of Pittsburgh and two other large commercial banksto supplement our supply of funds for loans and investments. During the firstand fourth quarters of 2008, when investment spreads were near-high levels, theBank implemented leverage strategies of $40.0 million and $20.0 million,respectively, which were funded by $60.0 million of Federal Home Loan Bankadvances. We borrowed an additional $10.0 million from the FHLB in the thirdquarter of 2008, and $15.0 million in collateralized borrowings from a largecommercial bank in both the third and fourth quarter to fund the Bank’s loangrowth.  Of the $100.0 million ofoutstanding borrowings at December 31, 2007, $80 million was borrowed fromthe Federal Home Loan Bank, $30.0 million, of which was borrowed in 2001 and$50.0 million, of which was borrowed in 2007, and $20.0 million wascollateralized borrowings from a large commercial bank in 2007.

 

The Federal Home Loan Bank functions as a central reserve bankproviding credit for its member financial institutions.  As a member, we are required to own capitalstock in the Federal Home Loan Bank and are authorized to apply for advances onthe security of such stock and certain of our whole first mortgage loans andother assets (principally mortgage related securities which are obligations of,or guaranteed by, the United States), provided certain standards related tocreditworthiness have been met.  Advancesare made under several different programs, each having its own interest rateand range of maturities.  Depending onthe program, limitations on the amount of advances are based either on a fixedpercentage of an institution’s net worth or on the Federal Home Loan Bank’sassessment of the institution’s creditworthiness.

 

**Personnel**

 

As of December 31,2008, we had 123 full-time employees and 28 part-time employees. We believe ourrelationship with our employees is good.

 

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**Subsidiaries**

 

During 2008, FoxChase Bank’s only active subsidiary was Fox Chase Financial, Inc., whichwas formed in February 1999. As a Delaware-chartered corporationinvestment company, Fox Chase Financial’s purpose is to manage and holdinvestment securities.

 

In February 2009,Fox Chase Bank established Fox Chase Service Corporation as a wholly-ownedsubsidiary.  A Pennsylvania-charteredcorporation, Fox Chase Service Corporation’s purpose is to make and manage theBank’s investment in Philadelphia Mortgage Advisors, Inc.

 

**REGULATIONAND SUPERVISION**

 

**General**

 

Fox Chase Bancorp, as a federally charteredcorporation, is subject to reporting to and regulation by the Office of ThriftSupervision.  Fox Chase Bancorp also issubject to the rules and regulations of the Securities and ExchangeCommission under the federal securities laws. Fox Chase Bank is subject to extensive regulation, examination andsupervision by the Office of Thrift Supervision, as its primary federalregulator, and the Federal Deposit Insurance Corporation, as its depositsinsurer.  Fox Chase Bank is a member ofthe Federal Home Loan Bank System and its deposit accounts are insured up toapplicable limits by the Deposit Insurance Fund managed by the Federal DepositInsurance Corporation.  Fox Chase Bankmust file reports with the Office of Thrift Supervision and the Federal DepositInsurance Corporation concerning its activities and financial condition inaddition to obtaining regulatory approvals prior to entering into certaintransactions 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.  Asa federal mutual holding company, Fox Chase MHC is also required by federal lawto report to, and otherwise comply with the rules and regulations of, theOffice of Thrift Supervision.  Theregulatory structure also gives the regulatory authorities extensive discretionin connection with their supervisory and enforcement activities and examinationpolicies, including policies with respect to the classification of assets andthe establishment of adequate 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 the regulatory requirements that areapplicable to Fox Chase Bank, Fox Chase Bancorp and Fox Chase MHC are describedbelow or elsewhere in this document.  Thedescription of statutory provisions and regulations applicable to savingsinstitutions and their holding companies set forth below and elsewhere in thisdocument does not purport to be a complete description of such statutes andregulations and their effects on Fox Chase Bank, Fox Chase Bancorp and FoxChase MHC and is qualified in its entirety by reference to the actual statutesand 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 thehighest rating on the CAMELS examination rating system) and an 8% risk-basedcapital ratio.  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.  

 

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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-based capital standard requires federalsavings institutions to maintain Tier 1 (core) and total capital (which isdefined as core capital and supplementary capital) to risk-weighted assets ofat least 4% and 8%, respectively.  Indetermining the amount of risk-weighted assets, all assets, including certain off-balancesheet assets, recourse obligations, residual interests and direct creditsubstitutes, are multiplied by a risk-weight factor of 0% to 100%, assigned bythe Office of Thrift Supervision capital regulation based on the risks believedinherent in the type of asset.  Core(Tier 1) capital is generally defined as common stockholders’ equity (includingretained earnings), certain noncumulative perpetual preferred stock and relatedsurplus and minority interests in equity accounts of consolidated subsidiariesless intangibles 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 of Thrift Supervision also has authority toestablish individual minimum capital requirements in appropriate cases upon adetermination that an institution’s capital level is or may become inadequatein light of the particular circumstances. At December 31, 2008, Fox Chase Bank met each of these capitalrequirements.

 

***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 savingsinstitution that has a tangible capital to assets ratio equal to or less than2% is deemed to be “critically undercapitalized.”  Subject to a narrow exception, the Office ofThrift Supervision is required to appoint a receiver or conservator within specifiedtime frames for an 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 thelesser 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 specified readilymarketable 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 mayrequire the institution to submit an acceptable plan to achieve compliance withthe standard.

 

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***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, the priorapproval of the Office of Thrift Supervision is required before any capitaldistribution if the institution does not meet the criteria for “expeditedtreatment” of applications under Office of Thrift Supervision regulations (*i.e.*, generally, examination and CommunityReinvestment Act ratings in the two top categories), the total capitaldistributions for the calendar year exceed net income for that year plus theamount of retained net income for the preceding two years, the institution wouldbe undercapitalized following the distribution or the distribution wouldotherwise be contrary to a statute, regulation or agreement with the Office ofThrift Supervision.  If an application isnot required, the institution must still provide prior notice to the Office ofThrift Supervision of the capital distribution if, like Fox Chase Bank, it is asubsidiary of a holding company.  If FoxChase Bank’s capital were ever to fall below its regulatory requirements or theOffice of Thrift Supervision notified it that it was in need of increasedsupervision, 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 propertyused to conduct business) in certain “qualified thrift investments” (primarilyresidential mortgages and related investments, including certain mortgage-backedsecurities) in at least 9 months out of each 12-month period.  Legislation has expanded the extent to whicheducation loans, credit card loans and small business loans may be considered “qualifiedthrift investments.”

 

A savings institution that fails the qualified thriftlender test is subject to certain operating restrictions and may be required toconvert to a bank charter.  As of December 31,2008, Fox Chase Bank maintained 80.1% of its portfolio assets in qualifiedthrift investments and, therefore, met the qualified thrift lender test.

 

***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-Oxley Act of2002 generally prohibits loans by Fox Chase Bancorp to its executive officersand 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 persons control,is limited.  The law limits both theindividual and aggregate amount of loans Fox Chase Bank may make to insidersbased, in part, on Fox Chase Bank’s capital position and requires certain boardapproval procedures to be followed.  Suchloans are required to be made on terms substantially the same as those offeredto unaffiliated individuals and not involve more than the normal risk ofrepayment.  There is an exception forloans made pursuant to a benefit or compensation program that is widely availableto all employees of the institution and does not give preference to insidersover 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 

 

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wrongful action likely tohave an adverse effect on an insured institution.  Formal enforcement action may range from theissuance of a capital directive or cease and desist order to removal ofofficers and/or directors to institution of receivership, conservatorship ortermination of deposit insurance.  Civilpenalties cover a wide range of violations and can amount to $25,000 per day,or even $1 million per day in especially egregious cases.  The Federal Deposit Insurance Corporation hasauthority to recommend to the Director of the Office of Thrift Supervision thatenforcement action be taken with respect to a particular savings institution.  If action is not taken by the Director, theFederal Deposit Insurance Corporation has authority to take such action undercertain circumstances.  Federal law alsoestablishes criminal penalties 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 the Bank for theyear ended December 31, 2008 totaled $183,000.

 

***Insurance of Deposit Accounts.***  Fox Chase Bank’s deposits are insured up to applicable limits bythe Deposit Insurance Fund of the FDIC. The Deposit Insurance Fund is the successor to the Bank Insurance Fundand the Savings Association Insurance Fund, which were merged in 2006.  Under the FDIC’s risk-based assessmentsystem, insured institutions are assigned to one of four risk categories basedon supervisory evaluations, regulatory capital levels and certain otherfactors.  An institution’s assessmentrate depends upon the category to which it is assigned, with less riskyinstitutions paying lower assessments.

 

For 2008, assessments ranged from five to 43 basispoints of assessable deposits.  Due tolosses incurred by the Deposit Insurance Fund from failed institutions in 2008,and anticipated future losses, the FDIC has adopted, pursuant to a RestorationPlan to replenish the fund, an across the board seven basis point increase inthe assessment range for the first quarter of 2009.  The FDIC has adopted further refinements toits risk-based assessment system that are effective April 1, 2009 andeffectively make the range seven to 77 1/2 basis points.  The FDIC hasalso imposed a special emergency assessment of 20 basis points of assessabledeposits, as of June 30, 2009, in order to cover the losses to theDeposit Insurance Fund.  The FDIC mayadjust the scale uniformly from one quarter to the next, except that noadjustment can deviate more than three basis points from the base scale withoutnotice and comment rulemaking.  Noinstitution may pay a dividend if in default of the federal deposit insuranceassessment.

 

Due to the recent difficult economic conditions,deposit insurance per account owner has been raised to $250,000 for all typesof accounts until January 1, 2010. In addition, the FDIC adopted an optional Temporary Liquidity GuaranteeProgram by which, for a fee, noninterest bearing transaction accounts wouldreceive unlimited insurance coverage until December 31, 2009 and certainsenior unsecured debt issued by institutions and their holding companiesbetween October 13, 2008 and June 30, 2009 would be guaranteed by theFDIC through June 30, 2012.  FoxChase Bank made the business decision toparticipate****in theunlimited noninterest bearing transaction account coverage and the Bank, theCompany and the MHC opted to not participate in the unsecured debt guaranteeprogram.

 

The Reform Act also provided for a one-time credit foreligible institutions based on their assessment base as of December 31,1996.  Subject to certain limitationswith respect to institutions that are exhibiting weaknesses, credits can beused to offset assessments until exhausted. During the fourth quarter of 2008 Fox Chase Bank had fully utilized thisone-time credit. As a result of the utilization of the one-time credit,previously discussed increase in insurance rates of seven basis points in thefirst quarter of 2009, and the previously discussed 20 basis point specialemergency assessment as of June 30, 2009, the Bank anticipates itsinsurance premiums will increase by approximately $1.9 million to $2.1 millionin 2009.  The 20 basis point specialemergency assessment as of June 30, 2009 comprises approximately $1.2million to $1.4 million of the 2009 increase.

 

Additionally, the FederalDeposit Insurance Corporation has authority to increase insuranceassessments.  A significant increase ininsurance premiums would likely have a continued adverse effect on ouroperating expenses and results of operations. Management cannot predict what insurance assessment rates will be in thefuture. The Reform Act also provided for the possibility that the FederalDeposit Insurance Corporation may pay dividends to insured institutions oncethe Deposit Insurance Fund reserve ratio equals or exceeds 1.35% of estimatedinsured deposits.

 

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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 December 31,2008 averaged 1.14 basis points of assessable deposits.

 

Insurance of deposits may be terminated by the FederalDeposit Insurance Corporation upon finding that the institution has engaged inunsafe or unsound practices, is in an unsafe or unsound condition to continueoperations or has violated any applicable law, regulation, rule, order orcondition imposed by the Federal Deposit Insurance Corporation or the Office ofThrift Supervision.  The management ofFox Chase Bank does not know of any practice, condition or violation that mightlead to termination of deposit 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 a memberof the Federal Home Loan Bank of Pittsburgh, is required to acquire and holdshares 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 at December 31,2008 of $9.7 million, which represented 4.75% of advances plus 0.75% of unusedborrowing capacity.

 

The Federal Home Loan Banks were required to providefunds for the resolution of insolvent thrifts in the late 1980s and arerequired to contribute funds for affordable housing programs.  These requirements could reduce the amount ofdividends that the Federal Home Loan Banks pay to their members and could alsoresult in the Federal Home Loan Banks imposing a higher rate of interest onadvances to their members.  If dividendswere reduced, or interest on future Federal Home Loan Bank advances increased,our net interest income would likely also be reduced.

 

During December 2008, the FHLB of Pittsburghannounced that it does not intend to pay a dividend on its common stock for theforeseeable future.  Additionally, theFHLB of Pittsburgh indicated it would not redeem any common stock associatedwith member advance repayments and that it may increase its individual memberstock investment requirements. The FHLB of Pittsburgh is permitted to increasethe amount of capital stock owned by the Company to 6.00% of a membersadvances, plus 1.50% of the unused borrowing capacity.  As of December 31, 2008, the Company’smaximum stock obligation was $14.0 million.

 

***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 that reservesbe 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 andreporting requirements.  In addition, theOffice of Thrift Supervision has enforcement authority over Fox Chase Bancorpand Fox Chase 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******RestrictionsApplicable to Mutual Holding Companies. ***Pursuantto federal law and Office of Thrift Supervision regulations, a mutual holdingcompany, such as Fox Chase MHC, may engage in the following activities:  (i) investing in the stock of a savingsassociation; (ii) acquiring a mutual association through the merger ofsuch association into a savings association subsidiary of such holding companyor an interim 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 performingmanagement services for a savings association subsidiary of such company; (vi) holding,managing or liquidating assets owned or acquired from a 

 

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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 trusteeunder deeds of trust; (ix) any other activity (A) that the FederalReserve Board, by regulation, has determined to be permissible for bank holdingcompanies under Section 4(c) of the Bank Holding Company Act, unlessthe Office of Thrift Supervision, by regulation, prohibits or limits any suchactivity for savings and loan holding companies or (B) in which multiplesavings and loan holding companies were authorized (by regulation) to directlyengage on March 5, 1987; and (x) purchasing, holding, or disposing ofstock acquired in connection with a qualified stock issuance if the purchase ofsuch stock by such savings and loan holding company is approved by the Officeof Thrift Supervision.

 

The Gramm-Leach Bliley Act of 1999 was designed tomodernize the regulation of the financial services industry by expanding theability of bank holding companies to affiliate with other types of financialservices companies such as insurance companies and investment bankingcompanies.  The legislation also expandedthe activities permitted for mutual savings and loan holding companies to alsoinclude any activity permitted a “financial holding company” under thelegislation, including a broad array of insurance and securities activities.

 

Federal law prohibits a savings and loan holdingcompany, including a federal mutual holding company, from, directly orindirectly or through one or more subsidiaries, acquiring more than 5% of thevoting stock of another savings institution, or holding company thereof,without prior written approval of the Office of Thrift Supervision.  Federal law also prohibits a savings and loanholding company from acquiring or retaining, with certain exceptions, more than5% of a non-subsidiary holding company or savings association.  A savings and loan holding company is alsoprohibited from acquiring more than 5% of a company engaged in activities otherthan those authorized by federal law; or acquiring or retaining control of adepository institution that is not insured by the Federal Deposit InsuranceCorporation.   In evaluating applicationsby holding companies to acquire savings institutions, the Office of Thrift Supervisionmust consider the financial and managerial resources and future prospects ofthe company and institution involved, the effect of the acquisition on the riskto the insurance funds, the convenience and needs of the community andcompetitive factors.

 

The Office of Thrift Supervision is prohibited fromapproving any acquisition that would result in a multiple savings and loanholding company controlling savings institutions in more than one state,except:  (i) the approval ofinterstate supervisory acquisitions by savings and loan holding companies, and (ii) theacquisition of a savings association in another state if the laws of the stateof the target savings institution specifically permit such acquisitions.  The states vary in the extent to which theypermit interstate savings and loan holding company acquisitions.

 

If the savings institution subsidiary of a savings andloan holding company fails to meet the qualified thrift lender test set forthin federal law, the holding company must register with the Federal ReserveBoard as a bank holding company within one year of the savings institution’sfailure to so qualify.

 

Although savings and loan holding companies are notcurrently subject to regulatory capital requirements or specific restrictions onthe payment of dividends or other capital distributions, federal regulations doprescribe such restrictions on subsidiary savings institutions.  Fox Chase Bank must notify the Office ofThrift Supervision 30 days before declaring any dividend.  In addition, the financial impact of aholding company on its subsidiary institution is a matter that is evaluated bythe Office of Thrift Supervision and the agency has authority to ordercessation of activities or divestiture of subsidiaries deemed to pose a threatto 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 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.

 

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***Waivers of Dividends by Fox Chase MHC. ***Office of ThriftSupervision regulations require Fox Chase MHC to notify the Office of ThriftSupervision if it proposes to waive receipt of dividends from Fox ChaseBancorp.  The Office of ThriftSupervision reviews dividend waiver notices on a case-by-case basis, and, ingeneral, does not object to any such waiver if: (i) the waiver would not be detrimental to the safe and soundoperation of the savings institution; and (ii) the mutual holding company’sboard of directors determines that such waiver is consistent with suchdirectors’ fiduciary duties to 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 conversiontransaction would be increased by any purchases by such stockholders in thestock offering conducted 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.

 

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# **EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The Board of Directors annually elects the executive officersof Fox Chase MHC, Fox Chase Bancorp and Fox Chase Bank, who serve at the Board’sdiscretion.  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 |       | Executive Vice  President, Chief Operating Officer and Secretary of Fox Chase  Bancorp, Inc., Fox Chase MHC and Fox Chase Bank |
|              |       |                                                                                                                                |
| Roger S. Deacon   |       | Executive Vice  President, Chief Financial Officer of Fox Chase Bancorp, Inc., Fox Chase  MHC and Fox Chase Bank               |
|              |       |                                                                                                                                |
| Keiron G. Lynch   |       | Executive Vice  President and Chief Payments Officer of Fox Chase Bank                                                              |
|              |       |                                                                                                                                |
| David C. Kowalek  |       | Executive Vice  President and Chief Credit Officer of Fox Chase Bank                                                                |
|              |       |                                                                                                                                |
| Richard J. Fuchs  |       | Executive Vice  President and Chief Deposit Officer of Fox Chase Bank                                                               |

 

Below is information regarding our executive officerswho are not also directors.  Unlessotherwise stated, each executive officer has held his or her current positionfor at least the last five years.  Agespresented are as of December 31, 2008.

 

*JerryD. Holbrook,*CMA, has served as Executive Vice President andChief Operating Officer since April 2008. From 2005 to March 2008, Mr. Holbrookserved as Executive Vice President and Chief Financial Officer of theCompany.  From 2003 to 2005, Mr. Holbrookwas Executive Vice President, Chief Financial Officer and Corporate Secretaryfor Northeast 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 servicesstart-up. Previously, he was Senior Vice President of Finance at First USA Bank(now part of J.P. Morgan Chase) where he managed the asset/liability managementcommittee and was responsible for securitization planning and debt issuancesfor a $70 billion credit card portfolio. He began his banking career with WSFSFinancial Corp. where he served as Senior Vice President and Controller. Mr. Holbrookholds a B.S. in Accounting from the University of Kentucky. Age 53.

 

*Roger S. Deacon*, CPA, has served as Executive Vice President and Chief Financial Officer since April 2008.   From July 2007 to March 2008, Mr. Deacon served as Executive Vice President and Chief Accounting Officer of the Company.  From October 2005 to June 2007, Mr. Deacon was Senior Vice President and Chief Financial Officer for NOVA Financial Holdings, Inc., a privately held bank holding company, and its principal subsidiary NOVA Savings Bank.   From January 2001 to September 2005, Mr. Deacon served as Chief Financial Officer for I4 Commerce, a privately held financial services company that provides services through its Bill Me Later product. Previously, he was Senior Vice President of Finance at First USA Bank (now part of J.P. Morgan Chase) where he was responsible for all financial planning for its credit card business, which grew from $2 billion to $70 billion in managed assets. He began his career with Price Waterhouse, where he served as an Audit Manager in their Financial Services Practice Group. Mr. Deacon holds a B.S. in Business Administration from Bucknell University, majoring in Accounting with a concentration in Finance. Age 45.

 

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*KeironG. Lynch*, CTP, has served as Executive Vice President andChief Payments Officer since April 2008. From 2005 to March 2008, Mr. Lynchserved as Executive Vice President and Chief Administrative Officer. From 1999to 2005, Mr. Lynch was Vice President of Global Visa Commerce ProductDevelopment for Visa International. Previously, he was Director of Delivery forThe Source2 Group, LLC, a joint venture between Mellon Bankand 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 51.

 

*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. Kowalekholds an MBA from Adelphi University and a B.S. in Economics and Mathematicsfrom Wilkes University. Age 55.

 

*RichardJ. Fuchs* has served as Executive Vice President and ChiefDeposit Officer since October 2007. From April 2006 to September 2007,Mr. Fuchs served Executive Vice President, Retail Bank Administration. Mr. Fuchsjoined Fox Chase Bank after 30 years with The Bryn Mawr Trust Company in BrynMawr, Pennsylvania where he was Senior Vice President of the Community BankingDivision and from 2000 to 2005 also served as the President and CEO of The BrynMawr Brokerage Company. Mr. Fuchs attended Villanova University where hemajored in Civil Engineering and is a graduate of the Stonier Graduate Schoolof Banking. Age 59.

 

**ITEM 1A.               RISK FACTORS**

 

**Ourlevel of assets categorized as doubtful, substandard or special mention exposeus to increased lending risk.  Further,if our allowance for loan losses is insufficient to absorb losses in our loanportfolio, our earnings could decrease.**

 

At December 31,2008, loans that we have categorized as doubtful, substandard or specialmention totaled $31.5 million, representing 5.3% of total loans. ** **If these loans do notperform according to their terms and the collateral is insufficient to pay anyremaining loan balance, we may experience loan losses, which could have amaterial effect on our operating results. Like all financial institutions, we maintain an allowance for loanlosses to provide for loans in our portfolio that may not be repaid in theirentirety.  We believe that our allowancefor loan losses is maintained at a level adequate to absorb probable lossesinherent in our loan portfolio as of the corresponding balance sheet date.  However, our allowance for loan losses maynot be sufficient to cover actual loan losses, and future provisions for loanlosses could materially adversely affect our operating results.

 

At December 31,2008, our allowance for loan losses totaled $6.3 million, which represented1.05% of total loans and 107.01% of nonperforming loans. We make variousassumptions and judgments about the collectibility of our loan portfolio,including the creditworthiness of our borrowers and their probability of makingpayment, as well as the value of real estate and other assets serving ascollateral for the repayment of many of our loans.  In determining the amount of the allowancefor loan losses, significant factors we consider include loss experience inparticular segments of the portfolio, trends and absolute levels of classifiedand criticized loans, trends and absolute levels in delinquent loans, trends inrisk ratings, trends in industry charge-offs by particular segments and changesin existing general economic and business conditions affecting our lendingareas and the national economy. If our assumptions are incorrect, our allowancefor loan losses may not be sufficient to cover losses inherent in our loanportfolio, resulting in additions to our allowance.  Material additions to our allowance couldmaterially decrease our net income.

 

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.

 

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**The current economic environment poses significant challenges for us andcould adversely affect our financial condition and results of operation.**

 

We currently areoperating in a challenging and uncertain economic environment, both nationallyand in the local markets that we serve. Financial institutions continue to beaffected by sharp declines in financial and real estate values.  Continued declines in real estate values andhome sales, and an increase in the financial stress on borrowers stemming froman uncertain economic environment, including rising unemployment, could have anadverse effect on our borrowers or their customers, which could adverselyimpact the repayment of the loans we have made. The overall deterioration ineconomic conditions also could subject us to increased regulatory scrutiny. Inaddition, a prolonged recession, or further deterioration in local economicconditions, could result in an increase in loan delinquencies; an increase inproblem assets and foreclosures; and a decline in the value of the collateralfor our loans.  Furthermore, a prolongedrecession or further deterioration in local economic conditions could drive thelevel of loan losses beyond the level we have provided for in our loan lossallowance, which could necessitate our increasing our provision for loanslosses, which would reduce our earnings. Additionally, the demand for our products and services could be reduced,which would adversely impact our liquidity and the level of revenues wegenerate.

 

**Ouremphasis on multi-family and commercial real estate, commercial andconstruction lending may expose us to increased lending risks.**

 

At December 31,2008, $257.9 million, or 43.4%, of our loan portfolio consisted of multi-familyand commercial real estate, commercial and construction loans.  This segment of our portfolio was $156.1million or 34.6% of our loan portfolio at December 31, 2007 and $64.4million or 17.9% of our loan portfolio at December 31, 2006.  The significant growth from 2006 to 2008 is aresult of our emphasis on these types of lending activities; including, in2006, hiring a highly experienced team of commercial lending and credit andrisk management professionals to accelerate this initiative. These types ofloans generally expose a lender to greater risk of non-payment and loss thanone- to four-family residential mortgage loans because repayment of the loansoften depends on the successful operation of the property and the income streamof the borrowers. Such loans typically involve larger loan balances to singleborrowers or groups of related borrowers compared to one- to four-familyresidential mortgage loans. In addition, since such loans generally entailgreater credit risk than one- to four-family residential mortgage loans, we mayneed to increase our allowance for loan losses in the future to account for thelikely increase in probable incurred credit losses associated with the growthof such loans. Also, many of our multi-family and commercial real estate andland borrowers have more than one loan outstanding with us. Consequently, anadverse development with respect to one loan or one credit relationship canexpose us to a significantly greater risk of loss compared to an adversedevelopment with respect to a one- to four-family residential mortgage loan.

 

**At December 31, 2008 our construction portfoliowas $65.0 million, of which $32.9 million represented commercial constructionloans and $32.1 million represented residential real estate constructionloans.  As a result of the deteriorationin local economic conditions in 2008, loans secured by residential real estatedevelopments experienced a slow down in absorption activity during 2008. Ingeneral, construction projects provide for an interest reserve which isutilized to pay the interest until a period of time until the project isexpected to produce positive cash flows. To the extent such economic conditions continue, construction loanborrowers could fully utilize their interest reserve prior to when the projectis able to generate cash flows.   If aborrower has insufficient liquidity to pay interest on such projects, the loancould become delinquent and require an increase in the allowance for loanlosses which would adversely impact our results of operations.**

** **

**The unseasoned nature of our multi-family andcommercial real estate, commercial and construction loan portfolios may resultin changes in estimating collectibility, which may lead to additionalprovisions or charge-offs, which could hurt our profits.**

** **

**Our commercial real estate, commercial andconstruction loan portfolio has increased $193.5 million or 300% in the lasttwo years.   Accordingly, much of thisloan portfolio is unseasoned. These loans also have not been subjected tocontinued declining and unfavorable economic conditions. As a result, it may bedifficult to predict the future performance of this part of our loan portfolio.These loans may have delinquency or charge-off levels above our historicalexperience, which could adversely affect our future performance. Further, thesetypes of loans generally have larger balances and involve a greater risk thanone- to four-family residential mortgage**loans. Accordingly, ifwemakeanyerrorsin judgment in the collectibility of our commercial loans, any resultingcharge-offs

 

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** **

**may belarger on a per loan basis than those incurred historically with ourresidential mortgage loan or consumer loan portfolios.**

** **

**Ourinvestment portfolio contains private label mortgage backed securities whichhad a significant unrealized loss position at December 31, 2008.**

 

The Company had one private label residential mortgagerelated security and three private label commercial mortgage related securitiesat December 31, 2008. The private label mortgage related security had anamortized cost of $889,000 and $1.2 million at December 31, 2008 and 2007,respectively, and an unrealized loss of $620,000 and an unrealized gain of$27,000 as of December 31, 2008 and 2007, respectively. Managementbelieves the impairment on this security is temporary based on the cash flows,credit rating, credit enhancement, structure of the underlying security andmanagement’s ability and intent to hold to recovery.  Payment performance on the underlying loans,of which 53% of the original mortgages were secured by property located inCalifornia, could deteriorate, causing cash flows and credit enhancement levelsto weaken and leading management to conclude the unrealized loss was other thantemporary.  If a determination occurredthat such unrealized loss was other than temporary, the unrealized loss at thatpoint in time would be recorded as a reduction of earnings in the Company’sincome statement, which would have a material adverse impact on our results ofoperations.

 

The private label commercial mortgage relatedsecurities each have a credit rating of AAA and have an amortized cost of $10.0million and $10.1 million at December 31, 2008 and 2007, respectively. Thesecurities had a combined unrealized loss of $2.7 million and an unrealizedgain of $68,000 at December 31, 2008 and 2007 respectively. Managementbelieves the impairment on these securities is temporary based on the cashflows, credit rating, credit enhancement, structure of the underlyingsecurities and management’s ability and intent to hold to recovery.  Payment performance on the underlying loans,which are primarily secured by commercial real estate projects such as officespace, retail centers and multi-family apartment facilities, could deteriorate,causing cash flows and credit enhancement levels to weaken and leading managementto conclude the unrealized loss was other than temporary.  If a determination occurred that suchunrealized loss was other than temporary, the unrealized loss at that point intime would be recorded as a reduction of earnings in the Company’s incomestatement, which would have a material adverse impact on our results ofoperations.

 

**As a member bank, we own stock in the FederalHome Loan Bank of Pittsburgh, which is experiencing financial difficulties.**

** **

Our agreement withthe Federal Home Loan Bank of Pittsburgh requires us to purchase capital stockin the Bank commensurate with the amount of our advances and unused borrowingcapacity.  This stock is carried at costand was $9.7 million at December 31, 2008, which represents 4.75% of ouroutstanding borrowings plus 0.75% of our uncommitted line with the Bank.  In December 2008, the FHLB of Pittsburghannounced that, as a result of deterioration in earnings, it did not intend topay a dividend on its common stock for the foreseeable future.  Additionally, the FHLB of Pittsburghindicated that it would not redeem any common stock associated with memberadvance repayments and that it may increase its individual member stockinvestment requirements. The FHLB of Pittsburgh is permitted to increase the amountof capital stock owned by the Company to 6.00% of our advances, plus 1.50% ofour unused borrowing capacity.  As of December 31,2008, the Company’s maximum stock obligation was $14.0 million.  Accordingly, the Company could be required toincrease its investment in Federal Home Loan Bank of Pittsburgh capital stockby $4.3 million, an  amount would not beearning a dividend for the foreseeable future. During 2008, the Company recognized $246,000 of dividend income from itsinvestment in FHLB of Pittsburgh common stock.

** **

**Ourinability to significantly increase deposits may cause us to rely more heavilyon wholesale funding strategies, which could increase our expenses andadversely affect our operating margins and profitability.**

 

Historically, we attemptedto be the market leader in rates on longer-term money market accounts andcertificates of deposit. However, in 2005, the Bank’s current 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 from2005 levels. Deposits were $608.5 million at December 31, 2008 compared to$682.3 million at December 31, 2005, representing a $73.8 million or 10.8%decline in deposits for the three years ended December 31, 2008.  Additionally, our deposits 

 

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increased only $22.9million, or 3.9%, during 2008 to $608.5 million at December 31, 2008 from$585.6 million at December 31, 2007, while our assets increased $118.4million, or 14.6%.

 

While we believe thatthrough branch expansion, our emphasis on building transaction accounts andincreased promotional efforts, we will increase deposits, there can be noguarantee that we will be able to grow deposits at the required levels to fundour asset growth. Further, the considerable competition for deposits in ourmarket makes it more difficult for us to obtain reasonably priced deposits. Ifwe are not able to increase deposits in an amount to support growth, we willhave to rely more heavily on wholesale strategies to fund our asset growth,which historically are more expensive than retail sources of funding. If we arerequired to rely more heavily on more expensive funding sources to supportfuture growth, our revenues may not increase proportionately to cover ourcosts. In this case, our operating margins and profitability would be adverselyaffected.

 

**FDICassessments will hurt earnings.**

 

As discussed in “*Regulation of Federal Savings Associations**— Insurance of Deposit Accounts,*”the Bank anticipates its insurance premiums will increase $1.9 million to $2.1million for 2009 as compared to 2008. The components of this increase are due to (1) final utilization ofthe one-time credit in 2008, (2) increase in insurance rates by sevenbasis points in the first quarter of 2009, and (3) a 20 basis pointspecial emergency assessment as of June 30, 2009.  Additionally, the FDIC is permitted to imposeadditional emergency special assessment after June 30, 2009, of up to 10basis points per quarter if necessary to maintain public confidence in federaldeposit insurance or as a result of deterioration in the deposit insurance fundreserve ratio due to institution failures. Any additional emergency special assessment imposed by the FDIC willfurther hurt the Company’s earnings.

 

Additionally, the FederalDeposit Insurance Corporation has authority to increase insuranceassessments.  A significant increase ininsurance premiums would likely have a continued adverse effect on ouroperating expenses and results of operations. Management cannot predict what insurance assessment rates will be in thefuture.

 

**Changesin interest rates could have a material adverse effect on our operations.**

 

The operations offinancial institutions are dependent to a large extent on net interest income,which is the difference between the interest income earned on interest-earningassets such as loans and investment securities and the interest expense paid oninterest-bearing liabilities such as deposits andborrowings.  Changes in the general level of interest rates canaffect our net interest income by affecting the difference between the weightedaverage yield earned on our interest-earning assets and the weighted averagerate paid on our interest-bearing liabilities, or interest rate spread, and theaverage life of our interest-earning assets and interest-bearingliabilities.  Changes in interest rates also can affect: (1) ourability to originate loans; (2) the value of our interest-earning assets,which would negatively impact stockholders’ equity, and our ability to realizegains from the sale of such assets; (3) our ability to obtain and retaindeposits in competition with other available investment alternatives; and (4) theability of our borrowers to repay adjustable or variable rateloans. Interest rates are highly sensitive to many factors, includinggovernment monetary policies, domestic and international economic and politicalconditions and other factors beyond our control.  Although we believethat the estimated maturities of our interest-earning assets currently are wellbalanced in relation to the estimated maturities of our interest-bearingliabilities, there can be no assurance that our profitability would not beadversely affected during any period of changes in interest rates.

 

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

 

We opened our Marmora,New Jersey branch office and two new loan production offices (with depositauthority) in the Philadelphia metropolitan area in 2006, one of which waslater closed when we opened our West Chester, Pennsylvania branch in 2007.  Numerous factors contribute to theperformance of a new branch or loan production facility, such as our ability toselect a suitable location, competition, our ability to hire and retainqualified personnel, and the effectiveness of our marketing strategy. It takestime for a new branch to generate significant deposits and loan volume tooffset expenses, some of which, like salaries and occupancy expense, arerelatively fixed costs.  Additionally,there can be no assurance that any of these new offices will ever becomeprofitable.  During the period of timebefore a branch office or loan production facility can become profitable,operating an office will negatively impact our net income.

 

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

 

Fox Chase MHC, Fox ChaseBancorp and Fox Chase Bank are subject to extensive regulation, supervision andexamination by the Office of Thrift Supervision and Fox Chase Bank is alsosubject to regulation and supervision by the Federal Deposit InsuranceCorporation, as insurer of its deposits. Such regulation and supervision governs the activities in which aninstitution and its holding company may engage, and are intended primarily forthe protection of the insurance fund and the depositors and borrowers of FoxChase Bank rather than for holders of Fox Chase Bancorp common stock.Regulatory authorities have extensive discretion in their supervisory andenforcement activities, including the imposition of restrictions on ouroperations, the classification of our assets and determination of the level ofour allowance for loan losses. Any change in such regulation and oversight,whether in the form of regulatory policy, regulations, legislation orsupervisory action, may have a material impact on our operations.

 

**Afurther downturn in the local economy or a further decline in real estatevalues could reduce our profits.**

 

Nearly all of our loansare secured by real estate or are made to businesses in the Philadelphiametropolitan or Southern New Jersey market areas. As a result of thisconcentration, a downturn in the local economies in these areas 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. During the fourth quarter of 2008, economic conditionsdeteriorated in certain parts of our market area leading to declining homevalues and an increase in nonperforming loans at December 31, 2008.  A further decline in real estate values couldcause some of our mortgage loans to become inadequately collateralized, whichwould expose us to a greater risk of loss.

 

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

 

We face intensecompetition in making loans, attracting deposits and attracting and retaining keyemployees and relationship managers. This competition has made it moredifficult for us to make new loans and at times has forced us to offer higherdeposit rates. 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. It has also made it more difficult and costly to attractand hire employees with the level of expertise we require to implement ourstrategic plan.   Additional compensationexpense increases noninterest expense, reducing net income. Competition alsomakes it more difficult to grow loans and deposits. As of June 30, 2008,the most recent date for which information is available, we held 0.20% of thedeposits in Philadelphia-Camden-Wilmington metropolitan statistical area.  In addition, at June 30, 2008, we heldapproximately 0.95% of the deposits in Atlantic and Cape May Counties.  Some of the institutions with which wecompete have substantially greater resources and lending limits than we haveand may offer services that we do not provide. We expect competition toincrease in the future as a result of legislative, regulatory and technologicalchanges and the continuing trend of consolidation in the financial servicesindustry. Our profitability depends upon our continued ability to competesuccessfully in our market areas.

 

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

 

Net income divided byaverage equity, known as “return on equity,” is a ratio many investors use tocompare the performance of a financial institution to its peers. Our return onequity was reduced due to the large amount of capital that we raised in our2006 stock offering and to expenses we are incurring in pursuing our growthstrategies, the costs of being a public company and added expenses associatedwith our employee stock ownership and equity incentive plans. Until we canincrease our net interest income and noninterest income, we expect our returnon equity to be below other similarly situated publicly traded thrifts, whichmay negatively affect the value of our common stock.  For the twelve months ended December 31,2008, our return on average equity was 1.00%.

 

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

 

Our noninterest expensesare impacted as a result of the financial, accounting, legal and various otheradditional expenses associated with operating as a public company.  We also recognize additional annual employeecompensation and benefit expenses stemming from the shares that are purchasedor granted to employees and executives under the employee stock ownership andequity incentive plans.  We recognizeexpenses for our employee stock ownership plan when shares are committed to bereleased to participants’ accounts. We recognize compensation expense forrestricted stock awards and stock options over the vesting period of awardsmade to recipients.  These additionalexpenses adversely affect our profitability.

 

**Our ability to access capital, includingundertaking a second-step conversion, is limited by current market conditions.**

 

While we anticipate thatwe have adequate capital for the foreseeable future, we may at some point needto raise additional capital, including undertaking a second-step conversiontransaction.  Current market conditionsare making it increasingly difficult to complete a second-step transaction,which may be desirous to stockholders as fully converted institutions tend totrade at higher multiples than mutual holding companies and fully convertedinstitutions have more flexibility in issuing additional shares of stock, whichallows for more acquisition opportunities. Our ability to raise additional capital, including our ability toundertake a second-step conversion transaction, will depend on conditions in thecapital markets, which are outside our control, and on our financialperformance.  Accordingly, we cannotassure you of our ability to raise additional capital on terms acceptable to usor our ability to complete a second-step transaction.  If we cannot do so, our ability to furtherexpand our operations through internal growth and to complete acquisitionscould be materially impaired.

 

**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.**

 

Fox Chase MHC owns amajority of Fox Chase Bancorp’s common stock and, through its board ofdirectors, is able to exercise voting control over most matters put to a voteof stockholders. The same directors and officers who manage Fox Chase Bancorpand Fox Chase Bank also manage Fox Chase MHC. As a federally chartered mutualholding company, the board of directors of Fox Chase MHC must ensure that theinterests of depositors of Fox Chase Bank are represented and considered inmatters put to a vote of stockholders of Fox Chase Bancorp. However, you shouldbe aware that the votes cast by Fox Chase MHC may not be in your personal bestinterests as a stockholder. For example, Fox Chase MHC may exercise its votingcontrol to defeat a stockholder nominee for election to the board of directorsof Fox Chase Bancorp. Moreover, Fox Chase MHC’s ability to elect the board ofdirectors of Fox Chase Bancorp restricts the ability of the minoritystockholders 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.

 

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

 

Current Office of ThriftSupervision regulations permit a mutual holding company to be acquired by amutual 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 

 

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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 our businessthrough our main office and branch offices. The following table sets forth certain information relating to thesefacilities as of December 31, 2008.

 
| **Location**                                             | ** ** | **Year  Opened** | ** ** | **Owned/  Leased** | ** ** | **Date of Lease  Expiration** | ** ** | **Net Book Value  as of****December 31, 2008** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|--------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | ** **       | ** ** | ** **         | ** ** | ** **                              | ** ** | **(In thousands)**                                                 | ** ** |
| **Main Office:**                                         |       |             |       |               |       |                                    |       |                                                                    |       |
| ** **                                               |       |             |       |               |       |                                    |       |                                                                    |       |
| 4390 Davisville Road  Hatboro, Pennsylvania              |       | 1996             |       | Owned              |       | —                                  |       | $                                                                       | 2,100      |   |
|                                                     |       |             |       |               |       |                                    |       |                                                                    |       |
| **Branch Offices:**                                      |       |             |       |               |       |                                    |       |                                                                    |       |
| ** **                                               |       |             |       |               |       |                                    |       |                                                                    |       |
| 401 Rhawn Street  Philadelphia, Pennsylvania             |       | 1956             |       | Owned              |       | —                                  |       | 592                                                                     |       |
|                                                     |       |             |       |               |       |                                    |       |                                                                    |       |
| 815 Bustleton Pike  Richboro, Pennsylvania               |       | 1985             |       | Owned              |       | —                                  |       | 474                                                                     |       |
|                                                     |       |             |       |               |       |                                    |       |                                                                    |       |
| 1 Fitzwatertown Road  Willow Grove, Pennsylvania         |       | 1995             |       | Owned              |       | —                                  |       | 405                                                                     |       |
|                                                     |       |             |       |               |       |                                    |       |                                                                    |       |
| 1041 York Road  Warminster, Pennsylvania                 |       | 2000             |       | Owned              |       | —                                  |       | 796                                                                     |       |
|                                                     |       |             |       |               |       |                                    |       |                                                                    |       |
| 921 West Avenue  Ocean City, New Jersey                  |       | 2000             |       | Owned              |       | —                                  |       | 470                                                                     |       |
|                                                     |       |             |       |               |       |                                    |       |                                                                    |       |
| 6059 Black Horse Pike  Egg Harbor Township, New Jersey   |       | 2000             |       | Owned              |       | —                                  |       | 851                                                                     |       |
|                                                     |       |             |       |               |       |                                    |       |                                                                    |       |
| 5871 Lower York Road  Lahaska, Pennsylvania              |       | 2004             |       | Owned              |       | —                                  |       | 1,420                                                                   |       |
|                                                     |       |             |       |               |       |                                    |       |                                                                    |       |
| 8 U.S. Route 9 South  Marmora, New Jersey                |       | 2006             |       | Owned              |       | —                                  |       | 1,595                                                                   |       |
|                                                     |       |             |       |               |       |                                    |       |                                                                    |       |
| 210 West State Street  Media, Pennsylvania               |       | 2006             |       | Leased             |       | 2010                                    |       | 16                                                                      |       |
|                                                     |       |             |       |               |       |                                    |       |                                                                    |       |
| 137 North High Street  West Chester, Pennsylvania        |       | 2007             |       | Owned              |       | —                                  |       | 1,774                                                                   |       |
| ** **                                               |       |             |       |               |       |                                    |       |                                                                    |       |
| **Administrative Offices:**                              |       |             |       |               |       |                                    |       |                                                                    |       |
|                                                     |       |             |       |               |       |                                    |       |                                                                    |       |
| 510 East Township Line Road (1)  Blue Bell, Pennsylvania |       | 2007             |       | Leased             |       | 2012                                    |       | 96                                                                      |       |
|                                                     |       |             |       |               |       |                                    |       |                                                                    |       |
| **Other Properties:**                                    |       |             |       |               |       |                                    |       |                                                                    |       |
|                                                     |       |             |       |               |       |                                    |       |                                                                    |       |
| 811 Bustleton Pike (2)  Richboro, Pennsylvania           |       | —           |       | Owned              |       | —                                  |       | 41                                                                      |       |
|                                                     |       |             |       |               |       |                                    |       |                                                                    |       |
| Absecon, New Jersey (3)                                  |       | —           |       | Owned              |       | —                                  |       | 1,957                                                                   |       |
|                                                          |            |                  |            |                    |            |                                         |            |                                                                         |            |  |

 

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(1)          This propertyhouses administrative, operational and information technology personnel.  We have an option to renew the lease for oneadditional five-year period.

(2)   This propertyincludes a residence with two apartments, which are leased to individuals.

(3)          Thisproperty is undeveloped land that may be developed for a future branch.  This property is under an option to be soldno later than 2010, subject to certain conditions being met including zoningand land use approvals.

** **

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** **
| **ITEM 3.** | ** ** | **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.

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

 

None.

 

# **PART II**

 
| **ITEM 5.** | ** ** | **MARKET FOR REGISTRANT’S COMMON  EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES** |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------|

 

**Market for Common Equity andRelated Stockholder Matters**

 

The Company’s commonstock is listed on the Nasdaq Stock Market (“Nasdaq”) under the trading symbol “FXCB.”  The following table sets forth the quarterlyhigh and low sales prices of Fox Chase Bancorp’s common stock for the two mostrecently completed fiscal years, as reported by Nasdaq.  The Company has not paid any dividends to itsstockholders to date.  See Item 1, *“Business—Regulation and Supervision—Regulation of FederalSavings Associations— Limitation on Capital Distributions” and note 13 in*the notes to the consolidated financial statements for more informationrelating to restrictions on the Bank’s ability to pay dividends to the Companyand the Company’s payment of dividends. As of March 10, 2009, the Company had approximately 991 holders ofrecord of common stock.

 

| **2008:**      | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
|           |       |     |       |    |       |
| Fourth Quarter |       | $        | 11.96      |    | $          | 9.39 |   |
| Third Quarter  |       | $        | 12.78      |    | $          | 9.82 |   |
| Second Quarter |       | $        | 12.59      |    | $          | 10.26 |   |
| First Quarter  |       | $        | 11.73      |    | $          | 10.40 |   |

 

| **2007:**      | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
|           |       |     |       |    |       |
| Fourth Quarter |       | $        | 13.15      |    | $          | 10.90 |   |
| Third Quarter  |       | $        | 13.74      |    | $          | 10.36 |   |
| Second Quarter |       | $        | 14.07      |    | $          | 13.03 |   |
| First Quarter  |       | $        | 14.32      |    | $          | 13.05 |   |

 

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**Stock Performance Graph**

 

The following graphcompares the cumulative total return of the Company common stock with thecumulative total return of the SNL Mid-Atlantic Thrift Index and the Index forthe Nasdaq Stock Market (U.S. Companies, all SIC).  The graph assumes that $100 was invested on October 2,2006, the first day of trading of the Company’s common stock on the NasdaqStock Market.  Cumulative total returnassumes reinvestment of all dividends.

 

** **
| ** **                    | ** ** | **Period Ending** | ** ** |
|-------------------------------|------------|------------------------|------------|
| **Index**                     | ** ** | **10/02/06**           | ** ** | **12/31/06** | ** ** | **06/30/07** | ** ** | **12/31/07** | ** ** | **06/30/08** | ** ** | **12/31/08** | ** ** |
| Fox Chase  Bancorp, Inc. |       | 100.00                 |       | 104.25 |   | 104.25 |   | 88.03 |   | 79.23 |   | 84.94 |   |
| NASDAQ Composite              |       | 100.00                 |       | 107.94 |   | 116.34 |   | 118.53 |   | 102.47 |   | 70.48 |   |
| SNL Mid-Atlantic  Thrift      |       | 100.00                 |       | 107.97 |   | 97.59 |   | 88.89 |   | 85.58 |   | 73.67 |   |

 

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**Purchases of Equity Securities**

 

The following tableprovides certain information with regard to shares repurchased by the Companyin the fourth quarter of 2008.

 
| **Period**                                            | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price Paid  Per Share** | ** ** | **Total Number  of Shares  Purchased  as Part of  Publicly  Announced Plans  or  Programs** | ** ** | **Maximum  Number of Shares  that May Yet be  Purchased Under  the Plans or  Programs** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                  |       |                                         |       |                                         |       |                                                                                                                 |       |                                                                                                                            |       |
| October 1,  2008 through October 31, 2008   |       | —                                       |       | —                                       |       | —                                                                                                               |       | 431,109                                                                                                                         |       |
|                                                  |       |                                         |       |                                         |       |                                                                                                                 |       |                                                                                                                            |       |
| November 1,  2008 through November 30, 2008 |       | 8,300                                        |       | $                                            | 11.20      |                                                                                                                 | 8,300      |                                                                                                                            | 422,809    |   |
|                                                  |       |                                         |       |                                         |       |                                                                                                                 |       |                                                                                                                            |       |
| December 1,  2008 through December 31, 2008 |       | 55,000                                       |       | $                                            | 10.96      |                                                                                                                 | 55,000     |                                                                                                                            | 367,809    |   |
|                                                  |       |                                         |       |                                         |       |                                                                                                                 |       |                                                                                                                            |       |
| Total (1)                                             |       | 63,300                                       |       | $                                            | 10.99      |                                                                                                                 | 63,300     |                                                                                                                            | —     |   |

 

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(1)  On February 7, 2008, the Companyannounced that the Board of Directors had approved a stock repurchase programauthorizing the Company to repurchase up to 327,000 shares of the Company’s common stock (the “February 2008program”). On July 31, 2008, the Company announced that the Board ofDirectors approved the repurchase of up to an additional 327,000 shares of theCompany’s common stock (the “July 2008 program”). These repurchaseprograms will continue until they are completed or terminated by the Board ofDirectors.

 

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| **ITEM 6.** | ** ** | **SELECTED FINANCIAL DATA** |
|-------------|------------|-----------------------------|

 
| ** **                       | ** ** | **At December 31,** | ** ** |
|----------------------------------|------------|-------------------------------|------------|
| ** **                       | ** ** | **2008**                      | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                       | ** ** | **(In thousands)**       | ** ** |
| **Financial  Condition Data:**   |       |                          |       |   |   |   |   |   |   |   |   |
| Total assets                     |       | $                             | 931,270    |   | $ | 812,919 |   | $ | 756,985 |   | $ | 781,291 |   | $ | 899,805 |   |
| Cash and cash  equivalents       |       | 3,944                         |       | 31,275 |   | 134,441 |   | 46,086 |   | 43,722 |   |
| Interest-earning  time deposits  |       | —                        |       | — |   | — |   | 600 |   | 3,174 |   |
| Securities  available-for-sale   |       | 294,723                       |       | 296,304 |   | 228,432 |   | 329,504 |   | 330,199 |   |
| Loans  receivable, net           |       | 588,975                       |       | 447,035 |   | 355,617 |   | 366,393 |   | 482,606 |   |
| Loans held for  sale             |       | —                        |       | — |   | 1,194 |   | 357 |   | — |   |
| Deposits                         |       | 608,472                       |       | 585,560 |   | 596,534 |   | 682,307 |   | 805,250 |   |
| Federal Home  Loan Bank advances |       | 146,379                       |       | 80,000 |   | 30,000 |   | 30,000 |   | 30,000 |   |
| Other borrowed  funds            |       | 50,000                        |       | 20,000 |   | — |   | — |   | — |   |
| Total  stockholders’ equity |       | 121,220                       |       | 122,371 |   | 125,645 |   | 63,521 |   | 59,190 |   |
|                                  |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                    | ** ** | **For the Year Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                                                     | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | **(In thousands)**                                      | ** ** |
| **Operating  Data:**                                          |       |                                                         |       |   |   |   |   |   |   |   |   |
| Interest income                                               |       | $                                                            | 45,884     |   | $ | 41,057 |   | $ | 37,177 |   | $ | 37,601 |   | $ | 37,566 |   |
| Interest expense                                              |       | 24,061                                                       |       | 22,250 |   | 20,459 |   | 20,697 |   | 19,693 |   |
| Net interest  income                                          |       | 21,823                                                       |       | 18,807 |   | 16,718 |   | 16,904 |   | 17,873 |   |
| Provision  (credit) for loan losses                           |       | 2,900                                                        |       | 425 |   | (5,394 | ) | (6,025 | ) | 12,282 |   |
| Net interest  income after provision (credit) for loan losses |       | 18,923                                                       |       | 18,382 |   | 22,112 |   | 22,929 |   | 5,591 |   |
| Noninterest  income                                           |       | 1,405                                                        |       | 2,696 |   | 2,073 |   | 1,214 |   | 2,279 |   |
| Noninterest  expenses                                         |       | 18,948                                                       |       | 18,688 |   | 19,867 |   | 15,208 |   | 11,353 |   |
| Income (loss)  before income taxes                            |       | 1,380                                                        |       | 2,390 |   | 4,318 |   | 8,935 |   | (3,483 | ) |
| Income tax  provision (benefit)                               |       | 165                                                          |       | 460 |   | 684 |   | 2,975 |   | (1,595 | ) |
| Net income  (loss) (1)(2)                                     |       | 1,215                                                        |       | $ | 1,930 |   | $ | 3,634 |   | $ | 5,960 |   | $ | (1,888 | ) |
| Earnings per  share (1)                                       |       | $                                                            | 0.09       |   | $ | 0.14 |   | $ | 0.14 |   | — |   | — |   |

 

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(1)                                  OnSeptember 29, 2006, Fox Chase Bancorp, Inc. completed its initialpublic offering of common stock. Earnings per share information for 2006 isonly for September 29, 2006 through December 31, 2006 due to the Bank’sreorganization into the mutual holding company form and the Company’s relatedinitial public offering.  Basic anddiluted earnings per share are the same for 2008, 2007 and 2006.

(2)                                  Netincome for 2006 reflects a charge of $1.5 million for the contribution made tothe Fox Chase Bank Charitable Foundation in connection with our initial publicoffering.

 

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| ** **                                                                                                  | ** ** | **At or for the Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2008**                                                                     | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Performance  Ratios:**                                                                                    |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Return on  average assets                                                                                   |       | 0.14                                                                         | %          | 0.26 | % | 0.49 | % | 0.71 | % | (0.21 | )% |
| Return on  average equity                                                                                   |       | 1.00                                                                         |       | 1.54 |   | 4.59 |   | 9.50 |   | (2.82 | ) |
| Interest rate  spread (1)                                                                                   |       | 2.01                                                                         |       | 1.85 |   | 1.90 |   | 1.78 |   | 1.92 |   |
| Net interest  margin (2)                                                                                    |       | 2.59                                                                         |       | 2.60 |   | 2.33 |   | 2.05 |   | 2.11 |   |
| Noninterest  expense to average assets                                                                      |       | 2.18                                                                         |       | 2.48 |   | 2.66 |   | 1.80 |   | 1.29 |   |
| Efficiency ratio  (3)                                                                                       |       | 82.0                                                                         |       | 91.8 |   | 105.8 |   | 79.7 |   | 56.3 |   |
| Average  interest-earning assets to average interest-bearing liabilities                                    |       | 119.7                                                                        |       | 123.7 |   | 113.5 |   | 109.1 |   | 107.7 |   |
| Average equity  to average assets                                                                           |       | 13.98                                                                        |       | 16.66 |   | 10.58 |   | 7.44 |   | 7.59 |   |
|                                                                                                        |       |                                                                         |       |   |   |   |   |   |   |   |   |
| **Capital  Ratios:**                                                                                        |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Total equity to  total assets                                                                               |       | 13.02                                                                        |       | 15.05 |   | 16.60 |   | 8.13 |   | 6.58 |   |
| Tier 1 capital  (to adjusted assets) (4)                                                                    |       | 10.70                                                                        |       | 12.03 |   | 12.49 |   | 8.40 |   | 6.66 |   |
| Tier 1 capital  (to risk-weighted assets) (4)                                                               |       | 18.11                                                                        |       | 21.78 |   | 26.79 |   | 17.76 |   | 12.92 |   |
| Total risk-based  capital (to risk-weighted assets) (4)                                                     |       | 19.25                                                                        |       | 22.54 |   | 27.62 |   | 19.02 |   | 14.17 |   |
|                                                                                                        |       |                                                                         |       |   |   |   |   |   |   |   |   |
| **Asset  Quality Ratios:**                                                                                  |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Nonperforming  loans as a percent of total loans                                                            |       | 0.98                                                                         |       | 0.18 |   | 0.90 |   | 1.36 |   | 0.29 |   |
| Allowance for  loan losses as a percent of total loans                                                      |       | 1.05                                                                         |       | 0.75 |   | 0.82 |   | 2.22 |   | 2.89 |   |
| Allowance for  loan losses as a percent of nonperforming loans and accruing loans 90 days or  more past due |       | 107                                                                          |       | 412 |   | 91 |   | 164 |   | 998 |   |
| Net charge-offs  (recoveries) to average outstanding loans during the period                                |       | —                                                                       |       | — |   | — |   | — |   | — |   |
|                                                                                                        |       |                                                                         |       |   |   |   |   |   |   |   |   |
| **Other  Data:**                                                                                            |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Number of:                                                                                                  |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Deposit accounts                                                                                            |       | 49,252                                                                       |       | 52,817 |   | 55,957 |   | 61,349 |   | 66,800 |   |
| Offices                                                                                                     |       | 11                                                                           |       | 11 |   | 11 |   | 8 |   | 8 |   |

 

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

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

(3)                                  Representsnoninterest expense divided by the sum of net interest income and noninterestincome, excluding gains or losses on the sale of securities, premises andequipment and assets acquired through foreclosure.  For 2006, reflects a charge of $1.5 millionfor the contribution made to the Fox Chase Bank Charitable Foundation inconnection with our initial public offering.

(4)                                  Ratiosare for Fox Chase Bank.

 

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| **ITEM 7.** | ** ** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION** |
|-------------|------------|------------------------------------------------------------------------------------------------|

 

**Overview**

 

The following describesvarious 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, securities andinterest-earning deposits at other banks, and interest expense, which is theinterest that we pay on our deposits, Federal Home Loan Bank borrowings and othercollateralized borrowings. To a much lesser extent, we also recognize pre-taxincome from service charges on deposit accounts and loans, from the increase incash surrender value of our bank-owned life insurance and from the sale ofloans, securities and other assets, as applicable.

 

***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 loss experience in particular segments of theportfolio, the size and composition of the loan portfolio, trends and absolutelevels of nonperforming loans, trends and absolute levels of classified andcriticized loans, trends and absolute levels in delinquent loans, trends inrisk ratings, trends in industry charge-offs by particular segments and changesin existing general economic and business conditions affecting our lendingareas and the national economy and results of impairment analyses.  Allocation of the allowance may be made forspecific loans, but the entire allowance is available for any loan that, inmanagement’s judgment, should be charged off.

 

***Expenses.*** The noninterest expense weincur in operating our business consist of salaries, benefits and othercompensation expenses, occupancy and furniture and equipment expenses, dataprocessing costs, professional fees, marketing expenses, Federal DepositInsurance Corporation premiums and various other miscellaneous expenses.

 

Salaries, benefits andother compensation consists primarily of salaries and wages paid to ouremployees, payroll taxes, expenses for health insurance, retirement plans,director and committee fees and other employee benefits, including employer 401(k) plancontributions, employee stock ownership plan allocations and equity incentiveawards, such as stock options and shares of restricted stock.

 

Occupancy expenses, whichare the fixed and variable costs of buildings such as depreciation charges,maintenance, real estate taxes and costs of utilities. Depreciation of premisesis computed using the straight-line method based on the useful lives of therelated assets, which range from ten to 39 years for buildings and premises.Leasehold improvements are amortized over the shorter of the useful life of theasset or the term of the lease.

 

Furniture and equipmentexpenses, which are the fixed and variable costs of furniture and equipment,consist primarily 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 processing costsinclude fees paid to our third-party data processing service and ATM expense.

 

Professional fees includefees paid to our independent auditors, internal auditors, attorneys,compensation consultants, loan review specialists, interest rate riskmanagement and costs associated with being a public company. Additionally, 2007included incremental attorneys and consultants costs associated with initialimplementation of Sarbanes-Oxley controls and procedures.

 

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

 

Federal Deposit InsuranceCorporation premiums are payments we make to the Federal Deposit InsuranceCorporation for insurance of our deposit accounts.

 

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Other expenses includeexpenses for stationary, printing, supplies, telephone, postage, contributionsand donations, regulatory assessments, insurance premiums, public companyexpenses and other fees and expenses.

 

**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 theBank had opened branch offices. This initiative led to a significant increasein loans from $414.4 million at December 31, 2003 to $482.6 million at December 31,2004. Also, we continued to offer higher rates on our deposits to fund the loangrowth. As a result, deposits increased from $723.8 million at December 31,2003 to $805.3 million at December 31, 2004. However, when these loanswere originated, they were not properly underwritten. Also, loan settlementswere not typically attended by anyone representing us. As a result, there wereinstances where the requirements of the loan commitment, including additionalrequired collateral, were not obtained. Further, construction loandisbursements were made without adequate controls. Additionally, the formermanagement of Fox Chase Bank failed to adopt a risk rating system and updateits allowance for loan losses policy to account for the new types of loans thatwere being originated. Further, management failed to properly review andclassify the new types of loans. 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 Orderon June 6, 2005. Additionally, it caused criticized and classified assetsto 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 thesame period, it did record a $12.3 million provision for loan losses in 2004,which contributed to a net loss of $1.9 million in 2004.

*** ***

***Operating Strategy During Pendency of Cease and Desist Order.***On June 6, 2005, we consented to the issuance of an Order to Cease andDesist by the Office of Thrift Supervision. In addition to citing numerousviolations, the Cease and Desist Order required us to discontinue a number ofpractices, and specifically ordered us to take certain actions. We were orderedto:

 

·                  discontinue originating certain typesof loans;

·                  restrict our asset growth to anamount not to exceed net interest credited on deposit liabilities;

·                  hire a new chief executive officer;

·                  improve our board’s oversight overlending and risk exposure, including assessing our capital position andexposure to higher-risk loans;

·                  developa new business plan with the goal to transition our operations into activitiesthat (1) entail less risk;  (2) providemore stable and sustainable sources of core income; and (3) are supportedby capital levels commensurate with the risks of our operations and compositionof our balance sheet;

·                  improve our loan underwriting andappraisal policies, loans-to-one borrower compliance and internal asset reviewprocedures;

·                  enhance our credit administration,board management and governance; and

·                  review and analyze our loan portfolioand, as appropriate, our allowance for loan losses.

 

Following the issuance ofthe Cease and Desist Order, most of our senior management and Board ofDirectors were replaced. The new management team and board launched initiativesto collect loans at the New Jersey shore area, gather sufficient borrowerinformation to properly document existing loans when possible, assign properrisk grades to loans following newly implemented credit risk assessmentpolicies, establish and maintain well documented estimates for the allowancefor loan losses, and establish appropriate underwriting, credit administration,and prudent credit risk management policies and procedures.

 

Additionally, initiativeswere undertaken to strengthen the system of internal controls, improve policiesand procedures and upgrade the quality and experience of management in allareas of the Company. Also, to comply with the Order, we improved our Board’soversight over lending and risk exposure, developed a new business plan,improved our loan underwriting and appraisal policies, loans-to-one borrowercompliance and internal asset review procedures, enhanced our creditadministration and Board management and governance. In addition, we reviewedand analyzed our loan portfolio and, as appropriate, reviewed our allowance forloan losses. As a result of these efforts, effective June 28, 2006, theOrder to Cease and Desist was terminated.

 

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As a result of the Ceaseand Desist Order and the prohibition on growing our asset size and specificallyfrom originating various types of loans and from loan sales of one to-four-family residential loans, which was done to manage interest rate risk, ourloan portfolio and asset size decreased. As a result, our funding needsdecreased, so we offered lower rates on our longer-term money market accountsand certificates of deposit to shorten the duration of our liabilities anddecrease our deposits.

 

***Current Operating Strategy.***  New management and the board reassessed ourstrategic direction and our opportunities for profitability in 2005. Thedetermination was made to capitalize on our 140-year tradition of strongpersonalized customer service, which we believe distinguishes us from the largeregional banks that operate in our market area. At the same time, the decisionwas made to differentiate ourselves from many small community banks in ourmarket by leveraging the strong commercial and business expertise of our newmanagement team and focusing on 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 many of the denovo financial 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, we attemptedto be the market leader in rates on longer-term money market accounts andcertificates of deposit. However, in 2005, the new management, in connectionwith the planned reductions in the levels of assets, offered lower depositrates as it attempted to allow longer-term money market accounts andcertificates of deposit to decrease, thereby shortening the duration ofliabilities.  This process was stoppedduring 2007. We believe that branch expansion and our emphasis on buildingtransaction accounts, both more fully described below, will increase deposits.However, the considerable competition for deposits in our market will make itmore difficult for us to obtain reasonably priced deposits. To the extent thatour retail funding sources do not provide for adequate funding, we will relymore heavily on wholesale funding in addition to retail funds to grow ourbalance sheet and fund loans.

 

Our mission is to becomethe leading relationship-based business and consumer bank in our market areasby delivering financial products and services tailored to our clients’ needs.We plan to continue our strategy of:

 

·                  pursuing opportunities to increasecommercial and small business lending in our primary market area;

 

·                  building profitable business andconsumer relationships with an emphasis on growing transaction deposit accountsand deposit balances;

 

·                  increasing income by expanding ourproduct offerings and continuing to emphasize customer service; and

 

·                  expanding our footprint and marketpresence through opening additional branch offices and utilizing technology todeliver services to businesses and retail deposit customers.

 

***Pursuing opportunities to increase commercial and smallbusiness lending in our primary market area***

 

At December 31,2008, $192.9 million, or 32.4% of our loan portfolio, consisted of multi-familyand commercial real estate loans and commercial business loans.  We intend to continue emphasizing these typesof lending.  In 2006, we hired a highlyexperienced team of commercial lending and commercial credit and riskmanagement professionals to accelerate this initiative. We may hire additionalcommercial lenders and cash management professionals in the future to increasethis type of lending.  Loans secured bymulti-family and commercial real estate and business assets are generallylarger and involve a greater degree of risk than one-to four-family residentialmortgage loans. Consequently, multi-family and commercial real estate andcommercial business loans typically have higher yields, which increase our netinterest margin and net interest spread. In addition, these loans arebeneficial for interest rate risk management because they typically haveshorter terms and adjustable interest rates. There are many multi-family andcommercial real estate properties and commercial businesses located in ourmarket area, and with the additional capital raised in the offering we maypursue the larger lending relationships associated with these opportunities,while continuing to originate any such loans in accordance with what we believeare our conservative underwriting guidelines.

 

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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, throughout 2005 and 2006, we have added significant commercialcredit expertise through the hiring of our chief credit officer, chiefadministrative officer, chief lending officer and a credit risk manager.   Additionally, we have created and revampedwhere necessary, our commercial lending credit-related policies and procedures.For a discussion of the risks related to our commercial loan portfolio, seeItem 1, “*Business—Loan Underwriting 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. We intend to focus our resources on growing profitable business andconsumer relationships built upon the primary transaction account. This isbecoming increasingly difficult. More competitors recognize the value of theprimary consumer and business transaction account and more automated paymentlinks in the form of direct debits and direct deposits make it increasinglyinconvenient to switch from one bank to another. Yet there remain opportunitiesto attract clients through exceptional service and convenience.

 

There are many factorsthat affect the profitability of client relationships, some of which are beyondour control. We use a number of business disciplines to promote profitablerelationships that include who we target to become clients, how we price ourproducts and services, how we underwrite and administer loans, how we identify,measure, monitor and manage risk, how we deploy our capital and how we manageand control costs. These measures combine to promote profitable relationships.

 

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

 

We are striving to becomea full-service financial services company offering our customers a broad rangeof loan and deposit products. On the lending side, we have a broad offering ofcommercial loan products, including unsecured lines of credit, letters ofcredit, commercial mortgage loans, revolving credit facilities and constructionloans. On the deposit side, we expanded our deposit products and services,including offering on-line bill payment and a suite of cash management productsand custodial services.

 

***Expanding our footprint and market presence through openingadditional branch offices and utilizing technology to deliver services tobusinesses and retail deposit customers.***

 

In 2006, we opened a newoffice in Marmora, New Jersey and loan production offices (with depositauthority) in Exton and Media, Pennsylvania. The Exton loan production officewas consolidated into our West Chester, Pennsylvania branch office when thatoffice opened in September 2007.  InMarch 2008, the Bank established a regional lending group in Ocean City,New Jersey.    We also will considerexpansion in and around our current market area in future years, whetherthrough de novo branching or acquisition. However, we have not entered into anybinding commitments regarding such expansion plans. The new branches have been,and are expected to continue to be, funded by cash generated by our business.Consequently, we do not expect to borrow funds for these expansion projects.

 

 **Critical Accounting Policies**

 

We consider accountingpolicies involving significant judgments and assumptions by management thathave, or could have, a material impact on the carrying value of certain assetsor on income to be critical accounting policies. We consider the following tobe our critical accounting policies: allowance for loan losses, deferred incometaxes and valuation and other-than-temporary impairment 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 

 

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and timing of future cashflows on impacted loans; value of collateral; and determination of loss factorsto be applied to the various elements of the portfolio. All of these estimatesare susceptible to significant change. Management reviews the level of theallowance on a quarterly basis and establishes the provision for loan lossesbased upon an evaluation of the size and composition of the loan portfolio,loss experience in particular segments of the portfolio, trends and absolutelevels of classified and criticized loans, trends and absolute levels indelinquent loans, trends in risk ratings, trends in industry charge-offs byparticular segments and changes in local and national economic and businessconditions.  Although we believe that weuse the best information available to establish the allowance for loan losses,future adjustments to the allowance may be necessary if actual conditionsdiffer substantially from the assumptions used in making the evaluation.Further, current economic conditions have increased the uncertainty inherent inthese estimates and assumptions.  Inaddition, the Office of Thrift Supervision, as an integral part of itsexamination process, periodically reviews our allowance for loan losses. Suchagency may require us to recognize adjustments to the allowance based on itsjudgments about information available to it at the time of its examination. Alarge loss could deplete the allowance and require increased provisions toreplenish the allowance, which would negatively affect earnings. For additionaldiscussion, see *“—Risk Management—Analysisand Determination of the Allowance for Loan Losses”* below and thenotes to the consolidated financial statements included in this annual report.

 

***Deferred Income Taxes.*** We use the assetand liability method of accounting for income taxes as prescribed in Statementof Financial Accounting Standards No. 109, “Accounting for Income Taxes.”Under this method, deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. Weexercise significant judgment in evaluating the amount and timing ofrecognition of the resulting tax liabilities and assets. These judgmentsrequire us to make projections of future taxable income. The judgments andestimates we make in determining our deferred tax assets, which are inherentlysubjective, are reviewed on a continual basis as regulatory and businessfactors change. Any reduction in estimated future taxable income may require usto record a valuation allowance against our deferred tax assets. Specifically,the Company had a charitable contribution carryover of $999,000 as of December 31,2008, resulting in a deferred tax asset of $340,000.  Utilization of this carryover is limited to10% of taxable income on an annual basis. Such carryover will expire on December 31,2011, if not utilized. If the Company is unable to generate sufficient taxableincome to utilize this carryover it may require us to record a valuationallowance against this deferred tax asset. Any valuation allowance would result in additional income tax expense inthe period, which would negatively affect earnings.

 

***Valuationand Other-Than-Temporary Impairment of Securities*.**Statement of FinancialAccounting Standards No. 115, “Accounting for Certain Investments in Debtand Equity Securities,” and FASB Staff Position FAS 115-1 and 124-1 “TheMeaning of Other Than Temporary Impairment and Its Application to CertainInvestments,” require companies to perform periodic reviews of individualsecurities in their investment portfolios to determine whether a decline in thevalue of a security is other than temporary. A review of other-than-temporaryimpairment requires companies to make certain judgments regarding the nature ofthe decline, its effect on the financial statements and the probability, extentand timing of a valuation recovery and the company’s intent and ability to holdthe security. Pursuant to these requirements, we assess valuation declines todetermine the extent to which such changes are attributable to (1) fundamentalfactors specific to the issuer, such as financial condition, business prospectsor other factors, or (2) market-related factors, such as interest rates orequity market declines. If the decline in the market value of a security isdetermined to be other than temporary, we reduce the book value of suchsecurity to its current market value, recognizing the decline as a realizedloss on the income statement. The Company did not have any other-than-temporaryimpairment charges in 2008 and management does not believe that any individualunrealized loss represents an other-than-temporary impairment at December 31,2008.  See Note 3 to the consolidatedfinancial statements for a schedule that shows gross unrealized losses and fairvalue of securities, aggregated by security category and length of time thatindividual securities have been in a continuous realized loss position, at December 31,2008 and 2007, and discussion regarding certain securities in an unrealizedloss position.  Also, see Note 14 of theconsolidated financial statements for a discussion on how we determined fairvalue for our financial instruments.

** **

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** **

**Balance Sheet Analysis**

 

***Loans.*** During 2008, we originated one-to four-family residential loans,multi-family and commercial real estate loans, construction loans, commercialloans and consumer loans.

 

The largest segment ofour loan portfolio is one- to four-family residential loans. At December 31,2008, these loans totaled $260.8 million, or 43.8% of total loans, compared to$215.8 million, or 47.9% of total loans, at December 31, 2007.  At December 31, 2006, these loanstotaled $209.5 million, or 58.3% of total loans.  The increase of $45.0 million, or 20.9%, in2008 was primarily a result of new relationships the Bank entered into in aneffort to grow its portfolio within its existing geographic region.  The increase in 2007 was the result of theCompany’s decision to stop selling one-to four-family residential loansbeginning in the second quarter of 2007. The Bank has not originated or targeted subprime loans in its loanportfolio.

 

Multi-family andcommercial real estate loans and commercial business loans totaled $192.9million and represented 32.4% of total loans at December 31, 2008 comparedto $109.6 million, or 24.3% of total loans, at December 31, 2007. Theseloans totaled $52.9 million, or 14.7% of total loans, at December 31,2006. The increases in 2008 and 2007 reflect the success of the new team ofcommercial lenders that were hired during 2006 and the opening of new officesin 2006 and 2007 as well as the establishment of a regional lending group inOcean City, New Jersey in the first quarter of 2008.  The Bank expects to continue to increasethese loan portfolios in the future.

 

Construction loanstotaled $65.0 million, or 10.9% of total loans, at December 31, 2008compared to $46.5 million, or 10.3% of total loans, at December 31,2007.  These loans totaled $11.6 million,or 3.2% of total loans, at December 31, 2006.  The increases in 2008 and 2007 reflect thehiring of a new team of acquisition, development and construction lendersduring 2006.  During 2008, the Bankde-emphasized its focus on growing this type of lending given current economicconditions and is presently working with certain borrowers in this lendingcategory to reduce the Bank’s level of exposure.

 

Consumer loans totaled$76.1 million, or 12.8% of total loans, at December 31, 2008 compared to$78.7 million, or 17.5% of total loans, at December 31, 2007. These loanstotaled $85.1 million, or 23.8% of total loans, at December 31, 2006. Thedecrease of $2.6 million during 2008 was due to the Bank de-emphasizing certainforms of consumer lending, particularly home equity lending, as a result of thedecrease in home values in certain parts of its lending area.  The decrease of $6.4 million during 2007 wasprimarily a result of the Bank reducing its promotional efforts surroundingconsumer loans in 2007 to focus on its commercial loan portfolio.  

 

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The following table sets forth the composition of our loan portfolio atthe dates indicated.

** **
|                                        | ** ** | **At December 31,**        | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|
|                                        | ** ** | **2008**                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                        | ** ** | **Amount**                           | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
|                                        | ** ** | **(Dollars in thousands)** | ** ** |
| Real estate loans:                          | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| One-to four-family                          |       | $                                    | 260,833    |   | 43.8 | % | $ | 215,817 |   | 47.9 | % | $ | 209,463 |   | 58.3 | % | $ | 228,476 |   | 60.9 | % | $ | 250,015 |   | 50.1 | % |
| Multi-family and commercial                 |       | 155,564                              |       | 26.2 |   | 76,287 |   | 16.9 |   | 44,681 |   | 12.4 |   | 32,923 |   | 8.8 |   | 85,585 |   | 17.2 |   |
| Construction                                |       | 65,002                               |       | 10.9 |   | 46,471 |   | 10.3 |   | 11,568 |   | 3.2 |   | 31,015 |   | 8.3 |   | 92,210 |   | 18.5 |   |
| Total real estate loans                     |       | 481,399                              |       | 80.9 |   | 338,575 |   | 75.1 |   | 265,712 |   | 73.9 |   | 292,414 |   | 78.0 |   | 427,810 |   | 85.8 |   |
| Consumer loans:                             |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Home equity loans                           |       | 63,987                               |       | 10.7 |   | 68,431 |   | 15.2 |   | 73,456 |   | 20.5 |   | 65,003 |   | 17.3 |   | 49,154 |   | 9.9 |   |
| Automobile                                  |       | 262                                  |       | 0.1 |   | 565 |   | 0.1 |   | 1,030 |   | 0.3 |   | 1,280 |   | 0.3 |   | 1,872 |   | 0.4 |   |
| Home equity lines of credit                 |       | 11,486                               |       | 1.9 |   | 9,642 |   | 2.1 |   | 10,468 |   | 2.9 |   | 16,269 |   | 4.3 |   | 18,249 |   | 3.6 |   |
| Other                                       |       | 351                                  |       | 0.1 |   | 106 |   | 0.1 |   | 148 |   | 0.1 |   | 188 |   | 0.1 |   | 1,305 |   | 0.3 |   |
| Total consumer loans                        |       | 76,086                               |       | 12.8 |   | 78,744 |   | 17.5 |   | 85,102 |   | 23.8 |   | 82,740 |   | 22.0 |   | 70,580 |   | 14.2 |   |
| Commercial                                  |       | 37,371                               |       | 6.3 |   | 33,356 |   | 7.4 |   | 8,194 |   | 2.3 |   | 175 |   | — |   | 175 |   | — |   |
| Total loans                                 |       | 594,856                              |       | 100.0 |   | 450,675 |   | 100.0 | % | 359,008 |   | 100.0 | % | 375,329 |   | 100.0 | % | 498,565 |   | 100.0 | % |
| Less:                                       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred loan origination costs (fees), net |       | 379                                  |       |   |   | (264 | ) |   |   | (442 | ) |   |   | (587 | ) |   |   | (1,568 | ) |   |   |
| Allowance for loan losses                   |       | (6,260                               | )          |   |   | (3,376 | ) |   |   | (2,949 | ) |   |   | (8,349 | ) |   |   | (14,391 | ) |   |   |
| Net loans                                   |       | $                                    | 588,975    |   |   |   | $ | 447,035 |   |   |   | $ | 355,617 |   |   |   | $ | 366,393 |   |   |   | $ | 482,606 |   |   |   |

 

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**LoanMaturity**

 

The following tables setforth certain information at December 31, 2008 regarding scheduledcontractual maturities during the periods indicated. The tables do not includeany estimate of prepayments which significantly shorten the average life of allloans and may cause our actual repayment experience to differ from that shownbelow. Demand loans having no stated schedule of repayments and no stated maturityare reported as due in one year or less. The amounts shown below excludedeferred loan fees and costs.

 
| ** **                            | ** ** | **At December 31, 2008** | ** ** |
|---------------------------------------|------------|-----------------------------------------|------------|
| ** **                            | ** ** | **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                      |       | $                                       | 655        |   | $ | 11,875 |   | $ | 50,759 |   | $ | 1,176 |   | $ | 8,685 |   | $ | 73,150 |   |
| More than one  year to two years      |       | 78                                      |       | 2,367 |   | 10,072 |   | 2,085 |   | 190 |   | 14,792 |   |
| More than two years  to three years   |       | 356                                     |       | 14,905 |   | 4,171 |   | 2,637 |   | 7,586 |   | 29,655 |   |
| More than three  years to five years  |       | 4,056                                   |       | 42,775 |   | — |   | 4,817 |   | 14,213 |   | 65,861 |   |
| More than five  years to ten years    |       | 46,640                                  |       | 37,931 |   | — |   | 17,461 |   | 6,697 |   | 108,729 |   |
| More than ten years  to fifteen years |       | 29,988                                  |       | 7,567 |   | — |   | 31,420 |   | — |   | 68,975 |   |
| More than  fifteen years              |       | 179,060                                 |       | 38,144 |   | — |   | 16,490 |   | — |   | 233,694 |   |
| Total                                 |       | $                                       | 260,833    |   | $ | 155,564 |   | $ | 65,002 |   | $ | 76,086 |   | $ | 37,371 |   | $ | 594,856 |   |

 

The following table setsforth the dollar amount of all scheduled maturities of loans at December 31,2008 that are due after December 31, 2009 and have either fixed interestrates or adjustable interest rates. The amounts shown below exclude unearnedinterest on consumer loans and deferred loan fees.

** **
| ** **                   | ** ** | **Fixed Rates**    | ** ** | **Floating or  Adjustable Rates** | ** ** | **Total** | ** ** |
|------------------------------|------------|-------------------------|------------|---------------------------------------------|------------|-----------|------------|
| ** **                   | ** ** | **(In thousands)** | ** ** |
| Real estate  loans:          |       |                    |       |                                        |       |      |       |
| One- to  four-family         |       | $                       | 240,056    |                                        | $          | 20,122    |       | $ | 260,178 |   |
| Multi-family and  commercial |       | 129,220                 |       | 14,469                                      |       | 143,689   |       |
| Construction                 |       | 2,973                   |       | 11,270                                      |       | 14,243    |       |
| Consumer loans               |       | 63,600                  |       | 11,310                                      |       | 74,910    |       |
| Commercial loans             |       | 4,465                   |       | 24,221                                      |       | 28,686    |       |
| Total                        |       | $                       | 440,314    |                                        | $          | 81,392    |       | $ | 521,706 |   |

 

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***Securities.***  Our securities portfolio consists primarilyof mortgage related securities, and, to a lesser extent, state and municipalsecurities, and investment grade corporate securities. Securities decreased$1.6 million, or 0.5%, in the year ended December 31, 2008. Purchases thatwere made in 2008 were primarily mortgage related securities totaling $144.8million, investment grade corporate securities totaling $11.1 million, stateand political subdivisions totaling $7.4 million. These purchases were offsetby maturities, calls, and principal repayments of $68.9 million, the sale of$67.5 million in short term-term auction rate bonds, the sale of $22.1 millionof mortgage related securities and the sale of $4.9 million of state andmunicipal securities, all of which were classified as available for sale.

 

Securities increased$67.9 million, or 29.7%, in the year ended December 31, 2007 primarily asa result of the Bank purchasing $188.0 million in securities throughout theyear.  Such purchases, which were part ofour leverage strategy, were primarily comprised of mortgage related securitiestotaling $91.7 million and purchases of state and political subdivisionstotaling $81.1 million.  These purchaseswere offset by maturities, calls and principal repayments of $86.1 million andthe sale of $30.5 million of mortgage related securities, $5.0 million of shortterm-term auction rate bonds, $700,000 of state and municipal securities and$107,000 of equity securities, all of which were classified as available forsale.

 

The following table setsforth the amortized cost and fair values of our securities portfolio at thedates indicated. All of our securities were classified as available-for-sale atthe dates indicated.

** **
| ** **                                            | ** ** | **At December 31,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                            | ** ** | **2008**                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                            | ** ** | **Amortized  Cost**           | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
| ** **                                            | ** ** | **(In thousands)**       | ** ** |
| Obligations of  U.S. government agencies              |       | $                             | —     |   | $ | — |   | $ | 10,000 |   | $ | 10,016 |   | $ | 42,344 |   | $ | 41,878 |   |
| State and political  subdivisions                     |       | 14,679                        |       | 14,463 |   | 81,019 |   | 81,143 |   | 24,126 |   | 24,219 |   |
| Corporate  securities                                 |       | 11,124                        |       | 10,578 |   | — |   | — |   | 4,017 |   | 4,015 |   |
|                                                  |       | 25,803                        |       | 25,041 |   | 91,019 |   | 91,159 |   | 70,487 |   | 70,112 |   |
| Private label  residential mortgage related security  |       | 889                           |       | 269 |   | 1,181 |   | 1,208 |   | 1,679 |   | 1,683 |   |
| Private label  commercial mortgage related securities |       | 10,049                        |       | 7,304 |   | 10,069 |   | 10,137 |   | — |   | — |   |
| Agency  residential mortgage related securities       |       | 257,990                       |       | 262,109 |   | 193,112 |   | 193,800 |   | 157,690 |   | 156,637 |   |
| Total mortgage  related securities                    |       | 268,928                       |       | 269,682 |   | 204,362 |   | 205,145 |   | 159,369 |   | 158,320 |   |
|                                                  |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Total securities                                      |       | $                             | 294,731    |   | $ | 294,723 |   | $ | 295,381 |   | $ | 296,304 |   | $ | 229,856 |   | $ | 228,432 |   |

 

See Note 3 to theconsolidated financial statements for a schedule that shows gross unrealizedlosses and fair value of securities, aggregated by security category and lengthof time that individual securities have been in a continuous realized lossposition at December 31, 2008 and 2007.

 

At December 31,2008, we had no investments in a single company or entity (other than state orU.S. Government-sponsored entity securities) that had an aggregate book valuein excess of 10% of our equity at December 31, 2008.

 

AtDecember 31, 2007, investments in state and political subdivisionsincluded $60.0 million of Pennsylvania Higher Education Assistance Agencyauction rate bonds.  The full balance ofthese bonds were sold at par value in the first quarter of 2008.

 

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The following table setsforth the stated maturities and weighted average yields of investmentsecurities at December 31, 2008. Weighted average yields on tax-exemptsecurities are not presented on a tax equivalent basis, as the amount would beimmaterial. Certain mortgage related securities have adjustable interest ratesand will reprice annually within the various maturity ranges. These repricingschedules 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**       | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|----------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------------|------------|-----------------|------------|
| ** **                                            | ** ** | **Fair  Value**                      | ** ** | **Weighted  Average  Yield**                                   | ** ** | **Fair  Value**                                                 | ** ** | **Weighted  Average  Yield**       | ** ** | **Fair  Value** | ** ** | **Weighted  Average  Yield** | ** ** | **Fair  Value** | ** ** | **Weighted  Average  Yield** | ** ** | **Fair  Value** | ** ** | **Weighted  Average  Yield** | ** ** |
| ** **                                            | ** ** | **(Dollars in thousands)** | ** ** |
| State and  political subdivisions                     |       | $                                    | —     |                                                           | —     |                                                            | $          | 1,574                              |       | 5.05            |       | $ | 7,543 |   | 5.69 |   | $ | 5,346 |   | 5.92 |   | $ | 14,463 |   | 5.71 |   |
| Corporate  securities                                 |       | 6,776                                |       | 3.81                                                           |       | 3,802                                                           |       | 5.56                               |       | —          |       | — |   | — |   | — |   | 10,578 |   | 4.48 |   |
|                                                  |       | 6,776                                |       |                                                           |       | 5,376                                                           |       |                               |       | 7,543           |       |   |   | 5,346 |   |   |   | 25,041 |   |   |   |
|                                                  |       |                                 |       |                                                           |       |                                                            |       |                               |       |            |       |   |   |   |   |   |   |   |   |   |   |
| Private label  residential mortgage related security  |       | —                               |       | —                                                         |       | —                                                          |       | —                             |       | —          |       | — |   | 269 |   | 5.11 |   | 269 |   | 5.11 |   |
| Private label  commercial mortgage related securities |       | —                               |       | —                                                         |       | 4,446                                                           |       | 5.40                               |       | —          |       | — |   | 2,858 |   | 5.51 |   | 7,304 |   | 5.44 |   |
| Agency  residential mortgage related securities       |       | 956                                  |       | 5.18                                                           |       | 2,573                                                           |       | 4.86                               |       | 13,173          |       | 5.13 |   | 245,407 |   | 5.12 |   | 262,109 |   | 5.12 |   |
| Total mortgage  related securities                    |       | 956                                  |       |                                                           |       | 7,019                                                           |       |                               |       | 13,173          |       |   |   | 248,534 |   |   |   | 269,682 |   |   |   |
|                                                  |       |                                 |       |                                                           |       |                                                            |       |                               |       |            |       |   |   |   |   |   |   |   |   |   |   |
| Total securities                                      |       | $                                    | 7,732      |                                                           |       |                                                            | $          | 12,395                             |       |            |       | $ | 20,716 |   |   |   | $ | 253,880 |   |   |   | $ | 294,723 |   |   |   |

 

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***Cash and Cash Equivalents. ***Ourprimary source of short-term liquidity and is comprised of branch working cash,a reserve requirement account at the Federal Reserve, an account at the FederalHome Loan Bank of Pittsburgh and money market accounts. Cash and cashequivalents decreased $27.3 million for the year ended December 31, 2008to fund loan growth during 2008.

 

***Deposits*****.**  Our primarysource of funds is our deposit accounts, which are comprised ofnoninterest-bearing demand accounts, interest-bearing NOW accounts, moneymarket accounts, savings accounts and certificates of deposit. These depositsare provided primarily by individuals and business within our marketareas.  Deposits increased $22.9 million,or 3.9%, for the year ended December 31, 2008 primarily as a result of anincrease in money market accounts of $50.7 million and noninterest-bearingdemand accounts of $3.3 million.  Theincrease in money market accounts was the result of targeted promotionalefforts to increase these balances.  Theincrease in noninterest-bearing demand accounts was a result of continuedefforts to increase commercial deposit relationships through the efforts of ourcommercial lending and cash management teams. These increases were offset by decreases in NOW accounts of $4.0million, savings accounts of $2.8 million and certificates of deposits of $24.3million.  All of these decreases wereprimarily a result of the highly competitive deposit market, which created adifficult climate for gathering deposits in a cost effective manner.

 

During 2007, our depositsdecreased $11.0 million, or 1.8%, primarily as a result of decreases in NOWaccounts of $11.4 million, savings accounts of $10.3 million and certificatesof deposit of $12.1 million, offset by an increase in money market accounts of$20.8 million and noninterest-bearing demand accounts of $2.0 million.  The increase in money market accounts and thedecrease in NOW accounts was a result of a successful promotion of the Bank’smoney market tiered-rate product, which resulted in a certain level of NOWaccounts being transferred to money market accounts.  The increase in noninterest-bearing demandaccounts was a result of continued efforts to increase commercial depositrelationships.  The reduction in savingsaccounts and certificates of deposit were primarily a result of the highlycompetitive deposit market, which, when combined with the flat yield curve forthe majority of 2007, created a difficult climate for gathering deposits in acost effective manner.

 

The following table setsforth the balances of our deposit products at the dates indicated.

** **

| ** **                          | ** ** | **At December 31,** | ** ** |
|-------------------------------------|------------|--------------------------|------------|
| ** **                          | ** ** | **2008**                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **(In thousands)**       | ** ** |
|                                |       |                     |       |   |   |   |   |
| Noninterest-bearing demand accounts | ** ** | $                        | 46,716     |   | $ | 43,462 |   | $ | 41,429 |   |
| NOW accounts                        | ** ** | 35,330                   |       | 39,299 |   | 50,717 |   |
| Money market accounts               | ** ** | 101,295                  |       | 50,568 |   | 29,770 |   |
| Savings accounts                    | ** ** | 51,196                   |       | 54,019 |   | 64,338 |   |
| Certificates of deposit             | ** ** | 373,935                  |       | 398,212 |   | 410,280 |   |
| Total                               |       | $                        | 608,472    |   | $ | 585,560 |   | $ | 596,534 |   |

 

The following tableindicates the amount of jumbo certificates of deposit by time remaining untilmaturity at December 31, 2008. Jumbo certificates of deposit require minimum deposits of $100,000.  We did not have any brokered deposits as of December 31,2008.

** **

| **Maturity Period at December 31, 2008** | ** ** | **Jumbo  Certificates  of Deposits** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|
| ** **                                    | ** ** | **(In thousands)**                   | ** ** |
| Three months or  less                         |       | $                                    | 11,209     |   |
| Over three  through six months                |       | 9,938                                |       |
| Over six through  twelve months               |       | 14,150                               |       |
| Over twelve  months                           |       | 41,644                               |       |
| Total                                         |       | $                                    | 76,941     |   |

 

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The following table setsforth the time deposits classified by rates at the dates indicated.

** **

| ** **          | ** ** | **Year Ended  December 31,** | ** ** |
|---------------------|------------|-----------------------------------|------------|
| ** **          | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **          | ** ** | **(In thousands)**                | ** ** |
|                |       |                              |       |   |   |   |   |
| 0.00 – 1.00%   |       | $                                 | 48         |   | $ | — |   | $ | — |   |
| 1.01 – 2.00%   |       | 12,503                            |       | — |   | — |   |
| 2.01 – 3.00%   |       | 71,649                            |       | 136 |   | 8,028 |   |
| 3.01 – 4.00%   |       | 123,267                           |       | 83,262 |   | 160,416 |   |
| 4.01 – 5.00%   |       | 109,583                           |       | 235,086 |   | 176,206 |   |
| 5.01 – 6.00%   |       | 40,148                            |       | 62,478 |   | 45,852 |   |
| 6.01 – greater |       | 16,737                            |       | 17,250 |   | 19,778 |   |
| Total               |       | $                                 | 373,935    |   | $ | 398,212 |   | $ | 410,280 |   |

 

The following table sets forth the amount and maturities of timedeposits classified by rates at December 31, 2008.

** **
| ** **          | ** ** | **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%   |       | $                             | 48         |                                              | $          | —                                               |       | $ | — |   | $ | — |   | $ | 48 |   | — | % |
| 1.01 – 2.00%   |       | 12,343                        |       | 160                                               |       | —                                               |       | — |   | 12,503 |   | 3.3 |   |
| 2.01 – 3.00%   |       | 65,182                        |       | 6,222                                             |       | 228                                                  |       | 17 |   | 71,649 |   | 19.2 |   |
| 3.01 – 4.00%   |       | 49,520                        |       | 55,122                                            |       | 6,386                                                |       | 12,239 |   | 123,267 |   | 33.0 |   |
| 4.01 – 5.00%   |       | 53,529                        |       | 7,647                                             |       | 10,755                                               |       | 37,652 |   | 109,583 |   | 29.3 |   |
| 5.01 – 6.00%   |       | 14,259                        |       | 6,996                                             |       | 18,751                                               |       | 142 |   | 40,148 |   | 10.7 |   |
| 6.01 – greater |       | 5,356                         |       | 11,381                                            |       | —                                               |       | — |   | 16,737 |   | 4.5 |   |
| Total               |       | 200,237                       |       | 87,528                                            |       | 36,120                                               |       | 50,050 |   | 373,935 |   | 100.0 | % |
|                     |            |                               |            |                                                   |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

The following table setsforth time deposit activity for the periods indicated.

** **

| ** **                        | ** ** | **Year Ended  December 31,** | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|
| ** **                        | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                        | ** ** | **(In thousands)**                | ** ** |
|                              |       |                              |       |   |   |   |   |
| Beginning balance                 |       | $                                 | 398,212    |   | $ | 410,280 |   | $ | 449,286 |   |
| Decrease before interest credited |       | (40,275                           | )          | (30,172 | ) | (55,740 | ) |
| Interest credited                 |       | 15,998                            |       | 18,104 |   | 16,734 |   |
| Net decrease in time deposits     |       | (24,277                           | )          | (12,068 | ) | (39,006 | ) |
| Ending balance                    |       | $                                 | 373,935    |   | $ | 398,212 |   | $ | 410,280 |   |

 

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***Borrowings.*** We utilize borrowings from the Federal Home Loan Bankof Pittsburgh and two other large commercial banks to provide additionalliquidity, aside from deposits, to fund our loans and investments. During thefirst and fourth quarters of 2008, when investment spreads were at near-highlevels, the Bank implemented leverage strategies of $40.0 million and $20.0million, respectively, which were funded by $60.0 million of Federal Home LoanBank advances. Additionally, during 2008, we borrowed $6.4 million, net ofprincipal amortizations, from the FHLB and $30.0 million in collateralizedborrowings from a large commercial bank to fund the Bank’s loan growth.

 

Of the $100.0million of outstanding borrowings at December 31, 2007, $80.0 million wasborrowed from the Federal Home Loan Bank, $30.0 million of which was borrowedin 2001 and $50.0 million of which was borrowed in 2007, and $20.0 million wascollateralized borrowings from a large commercial bank.

** **

| ** **                                                                 | ** ** | **Year Ended  December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                 | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                 | ** ** | **(Dollars in thousands)**        | ** ** |
|                                                                       |       |                              |       |   |   |   |   |
| Maximum amount of advances outstanding at any month  end during the period |       | $                                 | 196,379    |   | $ | 100,000 |   | $ | 30,000 |   |
| Average advances outstanding during the period                             |       | 149,008                           |       | 36,644 |   | 30,000 |   |
| Weighted average interest rate during the period                           |       | 3.70                              | %          | 4.64 | % | 4.88 | % |
| Balance outstanding at end of period                                       |       | $                                 | 196,379    |   | $ | 100,000 |   | $ | 30,000 |   |
| Weighted average interest rate at end of period                            |       | 3.59                              | %          | 3.87 | % | 4.88 | % |

 

**Resultsof Operations for the Years Ended December 31, 2008, 2007 and 2006**

 

***Overview.***

 

| ** **                       | ** ** | **Years Ended  December 31,** | ** ** |
|----------------------------------|------------|------------------------------------|------------|
| ** **                       | ** ** | **2008**                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                       | ** ** | **(Dollars in thousands)**         | ** ** |
|                             |       |                               |       |   |   |   |   |
| Net income                       |       | $                                  | 1,215      |   | $ | 1,930 |   | $ | 3,634 |   |
| Return on average assets         |       | 0.14                               | %          | 0.26 | % | 0.49 | % |
| Return on average equity         |       | 1.00                               |       | 1.54 |   | 4.59 |   |
| Average equity to average assets |       | 13.98                              |       | 16.66 |   | 10.58 |   |
|                                  |            |                                    |            |  |  |  |  |  |  |  |

 

***2008 vs. 2007.***  Net incomedecreased $715,000 for 2008 compared to 2007. The 2008 results included a provision for loan losses of $2.9 million,$1.9 million net of taxes,  compared to aprovision for loan losses of $425,000, $280,000 net of taxes, for 2007.  The 2007 results included a gain on the saleof the Bank’s operations center of $577,000, net of taxes.

 

***2007 vs. 2006.***  Net incomedecreased $1.7 million for 2007 compared to 2006.  The 2007 results included a gain on the saleof the Bank’s operations center of $577,000, net of taxes. The 2006 earningsincluded a credit to the provision for loan losses of $5.4 million and a $1.5million contribution to the Fox Chase Bank Charitable Foundation.  These two items, net of taxes, increasedearnings by approximately $2.6 million during 2006.

 

***Net Interest Income.***

 

***2008 vs. 2007*****.** Net interest income increased $3.0 million, or 16.0%, for 2008.  The net interest margin was 2.59% for 2008compared to 2.60% for 2007.  The increasein net interest income was primarily attributable to  an increase in the average balance of loansand mortgage related securities, offset by an increase in the average balanceof FHLB borrowings and a decrease in the average balance of taxable securities.

 

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Total interest incomeincreased $4.8 million, or 11.8%, to $45.9 million for 2008, due primarily to a$5.6 million, or 22.3%, increase in interest and fees on loans, an increase of$5.0 million in interest on mortgage related securities, offset by a decreaseof $4.0 million in other interest income and $2.0 million in interest ontaxable investment securities.  Interestincome on loans increased due to an increase in the average balance of $114.7million, offset by a 31 basis point decrease in the yield on loans from 6.25%to 5.94%, primarily due to the lower interest rate environment.  Interest income on mortgage relatedsecurities increased due to an increase in the average balance of $98.8 milliondue to the Company’s leverage strategies. The decrease in income on taxable securities was due to a decrease inthe average balance of $32.2 million and a decrease in the average yield of 103basis points.

 

Total interest expense increased$1.8 million, or 8.1%, to $24.1 million for 2008, due primarily to a $3.0million increase in interest expense on Federal Home Loan Bank advances and an$881,000 increase in interest expense on other borrowed funds, offset by adecrease of $2.1 million in interest expense on deposits.  Interest expense on Federal Home Loan Bankadvances and other borrowed funds increased primarily due to an increase inaverage borrowings of $112.4 million during 2008 as such borrowings were usedto fund loan growth and leverage strategies throughout the year.  This was offset by a 97 basis point decreasein the average rate paid on FHLB borrowings. The decreased deposit expense was due to a decrease in the average ratepaid on total deposits of 41 basis points offset by an increase of $4.2 millionin the average outstanding balance on interest bearing deposit accounts.

 

***2007 vs. 2006*****.** Net interest income increased $2.1 million, or 12.5%, for 2007.  The net interest margin was 2.60% for 2007compared to 2.33% for 2006.  Theimprovements in net interest income and the net interest margin in 2007 reflectthe Bank’s increase in higher-yielding commercial, commercial real estate andconstruction loans funded with the proceeds from liquidating lower-yieldingsecurities, an increase in the volume of loans and interest-earning demanddeposits generated by the proceeds received in the Company’s initial publicoffering and an increase in noninterest-bearing deposits.  Offsetting these improvements were highercosts associated with retail certificates of deposit and money market accountsduring 2007 due primarily to strong retail deposit pricing competition.

 

Total interest incomeincreased $3.9 million, or 10.4%, to $41.1 million for 2007, due to a $3.6million increase in interest and fees on loans, an increase of $1.6 million inother interest income, offset by a decrease of $1.4 million in interest anddividend income on investment securities.

 

Total interest expenseincreased $1.8 million, or 8.8%, to $22.3 million for 2007, due primarily to a$1.6 million increase in interest expense on deposits.  The increased deposits expense was due to anincrease in the average rate paid on deposits of 60 basis points, resulting ina $2.9 million increase in interest expense, offset by a reduction of interestexpense on deposits of $1.4 million due to a $52.9 million decrease in theaverage balance of deposits.  Interest expense on Federal Home Loan Bankadvances increased $157,000 as a result of the additional advances associatedwith the Company’s $50.0 million leverage strategy executed in the fourthquarter of 2007.

 

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*** ***

***Average Balances and Yields.**** *The following table presents information regardingaverage balances of assets and liabilities, the total dollar amounts ofinterest income and dividends from average interest-earning assets, the totaldollar amounts of interest expense on average interest-bearing liabilities, andthe resulting annualized average yields and costs.  The yields and costs for the periodsindicated are derived by dividing income or expense by the average balances ofassets or liabilities, respectively, for the periods presented.  Loan fees are included in interest income onloans and are insignificant.  Yields arenot presented on a tax-equivalent basis. Any adjustments necessary to present yields on a tax-equivalent basisare insignificant.

 
| ** **                                                               | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                               | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                               | ** ** | ** **                                  | ** ** | **Interest** | ** ** | ** ** | ** ** | ** ** | ** ** | **Interest** | ** ** | ** ** | ** ** | ** ** | ** ** | **Interest** | ** ** | ** ** | ** ** |
| ** **                                                               | ** ** | **Average**                                 | ** ** | **and** | ** ** | **Yield/** | ** ** | **Average** | ** ** | **and** | ** ** | **Yield/** | ** ** | **Average** | ** ** | **and** | ** ** | **Yield/** | ** ** |
| ** **                                                               | ** ** | **Balance**                                 | ** ** | **Dividends** | ** ** | **Cost** | ** ** | **Balance** | ** ** | **Dividends** | ** ** | **Cost** | ** ** | **Balance** | ** ** | **Dividends** | ** ** | **Cost** | ** ** |
| ** **                                                               | ** ** | **(Dollars in thousands)**        | ** ** |
| **Assets:**                                                              |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                                |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  demand deposits                                        |       | $                                           | 10,218     |   | $ | 131 |   | 1.28 | % | $ | 81,864 |   | $ | 4,167 |   | 5.09 | % | $ | 49,182 |   | $ | 2,573 |   | 5.23 | % |
| Money market  funds                                                      |       | 16,892                                      |       | 536 |   | 3.17 | % | 806 |   | 40 |   | 4.96 | % | — |   | — |   | — |   |
| Mortgage related  securities                                             |       | 246,811                                     |       | 12,356 |   | 5.01 | % | 147,978 |   | 7,329 |   | 4.95 | % | 184,558 |   | 8,035 |   | 4.35 | % |
| Taxable  securities                                                      |       | 29,334                                      |       | 1,240 |   | 4.23 | % | 61,530 |   | 3,236 |   | 5.26 | % | 100,271 |   | 3,893 |   | 0.04 | % |
| Nontaxable  securities                                                   |       | 15,350                                      |       | 613 |   | 3.99 | % | 24,023 |   | 924 |   | 3.85 | % | 23,427 |   | 934 |   | 3.99 | % |
| Loans:                                                                   |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential loans                                                        |       | 238,858                                     |       | 13,550 |   | 5.67 | % | 208,828 |   | 11,791 |   | 5.65 | % | 218,397 |   | 12,134 |   | 5.56 | % |
| Commercial loans                                                         |       | 203,391                                     |       | 13,048 |   | 6.31 | % | 113,822 |   | 8,800 |   | 7.63 | % | 56,863 |   | 4,808 |   | 8.34 | % |
| Consumer loans                                                           |       | 76,545                                      |       | 4,410 |   | 5.76 | % | 81,467 |   | 4,770 |   | 5.86 | % | 84,704 |   | 4,800 |   | 5.67 | % |
| Total Loans                                                              |       | 518,794                                     |       | 31,008 |   | 5.94 | % | 404,117 |   | 25,361 |   | 6.25 | % | 359,964 |   | 21,742 |   | 6.04 | % |
| Allowance for  loan losses                                               |       | (3,857                                      | )          |   |   |   |   | (3,056 | ) |   |   |   |   | (7,057 | ) |   |   |   |   |
| Net loans                                                                |       | 514,937                                     |       | 31,008 |   |   |   | 401,061 |   | 25,361 |   |   |   | 352,907 |   | 21,742 |   |   |   |
| Total  interest-earning assets                                           |       | 833,542                                     |       | 45,884 |   | 5.45 | % | 717,262 |   | 41,057 |   | 5.68 | % | 710,345 |   | 37,177 |   | 5.17 | % |
| Noninterest-earning  assets                                              |       | 35,946                                      |       |   |   |   |   | 36,172 |   |   |   |   |   | 37,461 |   |   |   |   |   |
| Total assets                                                             |       | $                                           | 869,488    |   |   |   |   |   | $ | 753,434 |   |   |   |   |   | $ | 747,806 |   |   |   |   |   |
| Liabilities and  equity:                                                 |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW and money  market deposit accounts                                   |       | $                                           | 109,499    |   | $ | 2,307 |   | 2.11 | % | $ | 81,943 |   | $ | 1,997 |   | 2.44 | % | $ | 90,129 |   | $ | 1,683 |   | 1.87 | % |
| Savings accounts                                                         |       | 52,748                                      |       | 158 |   | 0.30 | % | 59,160 |   | 424 |   | 0.72 | % | 75,212 |   | 557 |   | 0.74 | % |
| Certificates of  deposit                                                 |       | 385,141                                     |       | 15,998 |   | 4.15 | % | 402,120 |   | 18,105 |   | 4.50 | % | 430,736 |   | 16,734 |   | 3.88 | % |
| Total interest-bearing  deposits                                         |       | 547,388                                     |       | 18,463 |   | 3.37 | % | 543,223 |   | 20,526 |   | 3.78 | % | 596,077 |   | 18,974 |   | 3.18 | % |
| FHLB advances                                                            |       | 122,145                                     |       | 4,635 |   | 3.73 | % | 34,422 |   | 1,642 |   | 4.70 | % | 30,000 |   | 1,485 |   | 4.88 | % |
| Other borrowed  funds                                                    |       | 26,863                                      |       | 963 |   | 3.53 | % | 2,222 |   | 82 |   | 3.62 | % | — |   | — |   | 0.00 | % |
| Total borrowings                                                         |       | 149,008                                     |       | 5,598 |   | 3.70 | % | 36,644 |   | 1,724 |   | 4.64 | % | 30,000 |   | 1,485 |   | 4.88 | % |
| Total  interest-bearing liabilities                                      |       | 696,396                                     |       | 24,061 |   | 3.44 | % | 579,867 |   | 22,250 |   | 3.83 | % | 626,077 |   | 20,459 |   | 3.27 | % |
| Noninterest-bearing  deposits                                            |       | 46,044                                      |       |   |   |   |   | 43,036 |   |   |   |   |   | 36,245 |   |   |   |   |   |
| Other  noninterest-bearing liabilities                                   |       | 5,462                                       |       |   |   |   |   | 4,983 |   |   |   |   |   | 6,342 |   |   |   |   |   |
| Total liabilities                                                        |       | 747,902                                     |       |   |   |   |   | 627,886 |   |   |   |   |   | 668,664 |   |   |   |   |   |
| Retained earnings                                                        |       | 121,852                                     |       |   |   |   |   | 126,257 |   |   |   |   |   | 80,183 |   |   |   |   |   |
| Accumulated  comprehensive income                                        |       | (266                                        | )          |   |   |   |   | (709 | ) |   |   |   |   | (1,041 | ) |   |   |   |   |
| Total  stockholder’s equity                                         |       | 121,586                                     |       |   |   |   |   | 125,548 |   |   |   |   |   | 79,142 |   |   |   |   |   |
| Total liabilities  and stockholders’ equity                         |       | $                                           | 869,488    |   |   |   |   |   | $ | 753,434 |   |   |   |   |   | $ | 747,806 |   |   |   |   |   |
|                                                                     |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                                                     |       |                                        |       | $ | 21,823 |   |   |   |   |   | $ | 18,807 |   |   |   |   |   | $ | 16,718 |   |   |   |
| Interest rate  spread                                                    |       |                                        |       |   |   | 2.01 | % |   |   |   |   | 1.85 | % |   |   |   |   | 1.90 | % |
| Net interest  margin                                                     |       |                                        |       |   |   | 2.59 | % |   |   |   |   | 2.60 | % |   |   |   |   | 2.33 | % |
| Average  interest-earning assets to average interest-bearing liabilities |       |                                        |       |   |   | 119.7 | % |   |   |   |   | 123.7 | % |   |   |   |   | 113.5 | % |

 

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***Rate/Volume Analysis*****.**  The followingtable sets forth the effects of changing rates and volumes on our net interestincome.  The rate column shows theeffects attributable to changes in rate (changes in rate multiplied by currentvolume).  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, 2008  Compared to  Year Ended December 31, 2007** | ** ** | **Year  Ended  December 31, 2007  Compared to  Year Ended December 31, 2006** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **Increase  (Decrease)  Due to**                                                        | ** ** | ** **                                                                              | ** ** | **Increase  (Decrease)  Due to** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Rate**                                                                                | ** ** | **Volume**                                                                              | ** ** | **Net** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Net** | ** ** |
| ** **                          | ** ** | **(In  Thousands)**                                                                     | ** ** |
| Interest and  dividend income:      |       |                                                                                    |       |                                                                                    |       |   |   |   |   |   |   |   |   |
| Interest-earning  demand deposits   |       | $                                                                                       | (389       | )                                                                                       | $          | (3,647 | ) | $ | (4,036 | ) | $ | (116 | ) | $ | 1,710 |   | $ | 1,594 |   |
| Loans:                              |       |                                                                                    |       |                                                                                    |       |   |   |   |   |   |   |   |   |
| Residential  loans                  |       | 63                                                                                      |       | 1,696                                                                                   |       | 1,759 |   | 189 |   | (532 | ) | (343 | ) |
| Commercial loans                    |       | (2,677                                                                                  | )          | 6,925                                                                                   |       | 4,248 |   | (824 | ) | 4,816 |   | 3,992 |   |
| Consumer loans                      |       | (72                                                                                     | )          | (288                                                                                    | )          | (360 | ) | 153 |   | (183 | ) | (30 | ) |
| Total loans                         |       | (2,686                                                                                  | )          | 8,333                                                                                   |       | 5,647 |   | (482 | ) | 4,101 |   | 3,619 |   |
| Money market  funds                 |       | (302                                                                                    | )          | 798                                                                                     |       | 496 |   | — |   | 40 |   | 40 |   |
| Mortgage related  securities        |       | 132                                                                                     |       | 4,895                                                                                   |       | 5,027 |   | 887 |   | (1,593 | ) | (706 | ) |
| Taxable  securities                 |       | (303                                                                                    | )          | (1,693                                                                                  | )          | (1,996 | ) | 856 |   | (1,513 | ) | (657 | ) |
| Nontaxable  securities              |       | 23                                                                                      |       | (334                                                                                    | )          | (311 | ) | (34 | ) | 24 |   | (10 | ) |
| Total  interest-earning assets      |       | (3,525                                                                                  | )          | 8,352                                                                                   |       | 4,827 |   | 1,111 |   | 2,769 |   | 3,880 |   |
|                                |       |                                                                                    |       |                                                                                    |       |   |   |   |   |   |   |   |   |
| Interest  expense:                  |       |                                                                                    |       |                                                                                    |       |   |   |   |   |   |   |   |   |
| NOW and money  market deposits      |       | (362                                                                                    | )          | 672                                                                                     |       | 310 |   | 467 |   | (153 | ) | 314 |   |
| Savings accounts                    |       | (220                                                                                    | )          | (46                                                                                     | )          | (266 | ) | (14 | ) | (119 | ) | (133 | ) |
| Certificates of  deposit            |       | (1,343                                                                                  | )          | (764                                                                                    | )          | (2,107 | ) | 2,482 |   | (1,111 | ) | 1,371 |   |
| Total  interest-bearing deposits    |       | (1,925                                                                                  | )          | (138                                                                                    | )          | (2,063 | ) | 2,935 |   | (1,383 | ) | 1,552 |   |
|                                |       |                                                                                    |       |                                                                                    |       |   |   |   |   |   |   |   |   |
| FHLB advances                       |       | (1,192                                                                                  | )          | 4,185                                                                                   |       | 2,993 |   | (62 | ) | 219 |   | 157 |   |
| Other borrowed  funds               |       | (25                                                                                     | )          | 906                                                                                     |       | 881 |   | — |   | 82 |   | 82 |   |
| Total  interest-bearing liabilities |       | (3,142                                                                                  | )          | 4,953                                                                                   |       | 1,811 |   | 2,873 |   | (1,082 | ) | 1,791 |   |
| Net change in  interest income      |       | $                                                                                       | (383       | )                                                                                       | $          | 3,399 |   | $ | 3,016 |   | $ | (1,762 | ) | $ | 3,851 |   | $ | 2,089 |   |

 

***Provision for Loan Losses.***

 

***2008 vs. 2007. ***The Company recorded a provision for loan losses of$2.9 million in 2008 compared to $425,000 in 2007.  The increase in the provision was a resultof: (1) downgrades to existing credits, primarily in the residential realestate development portfolio; (2) increases to loss factors for classifiedloans and the construction loan portfolio, which were a result of thesignificant deterioration in the economic environment primarily during thefourth quarter of 2008; and (3) the establishment of a specific reserve of$624,000 related to a $3.5 million construction loan collateralized by aresidential housing development located in southern New Jersey.

 

***2007 vs. 2006. ***The Company recorded a provision for loan losses of$425,000 in 2007 compared to a credit to the provision for loan losses of $5.4million in 2006.  The provision for loanlosses reflects continued growth in the loan portfolio during 2007 and a shiftin the mix of the loan portfolio to more commercial-type loans, which typicallyhave higher levels of risk, offset by decreases in nonperforming and classifiedassets and the absence of any net charge-offs in 2007.

 

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

 

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*** ***

***Noninterest Income.***  The followingtable shows the components of noninterest income for 2008, 2007 and 2006.

** **
| ** **                            | ** ** | **Years Ended December 31,** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **$ Change** | ** ** | **% Change**  | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|-------------------|------------|--------------|------------|-------------------|------------|---------------|------------|
| ** **                            | ** ** | **2008**                          | ** ** | **2007**          | ** ** | **2006**     | ** ** | **2008/2007**     | ** ** | **2007/2006** | ** ** |
|                                  |       | **(In thousands)**                |       |              |       |         |       |              |       |          |       |
|                                  |       |                              |       |              |       |         |       |              |       |          |       |   |   |   |   |
| Service charges  and other fee income |       | $                                 | 748        |              | $          | 842          |       | $                 | 1,138      |          | $          | (94 | ) | (11.2 | )% | $ | (296 | ) | (26.0 | )% |
| Net gain (loss)  on sale of:          |       |                              |       |              |       |         |       |              |       |          |       |   |   |   |   |
| Securities  available-for-sale        |       | 118                               |       | 169               |       | (17          | )          | (51               | )          | (30.2         | )%         | 186 |   | (1094.1 | )% |
| Loans                                 |       | 10                                |       | 78                |       | 199          |       | (68               | )          | (87.2         | )%         | (121 | ) | (60.8 | )% |
| Assets acquired  through foreclosure  |       | —                            |       | —            |       | 85           |       | —            |       | 0.0           | %          | (85 | ) | (100.0 | )% |
| Premises and  equipment               |       | —                            |       | 970               |       | (59          | )          | (970              | )          | (100.0        | )%         | 1,029 |   | (1744.1 | )% |
| Income on  bank-owned life insurance  |       | 452                               |       | 438               |       | 427          |       | 14                |       | 3.2           | %          | 11 |   | 2.6 | % |
| Other                                 |       | 77                                |       | 199               |       | 300          |       | (122              | )          | (61.3         | )%         | (101 | ) | (33.7 | )% |
|                                  |       |                              |       |              |       |         |       |              |       |          |       |   |   |   |   |   |   |   |   |   |
| Total  Noninterest Income             |       | $                                 | 1,405      |              | $          | 2,696        |       | $                 | 2,073      |          | $          | (1,291 | ) | (47.9 | )% | $ | 623 |   | 30.1 | % |

 

***2008 vs. 2007*****.**   Noninterestincome decreased $1.3 million for 2008. The decrease for 2008 was primarily due to $970,000 of gains on thesales of properties in 2007, which included a gain on the sale of the Bank’soperations center of $875,000 and a gain on sale of land of $97,000. Gains onsales of loans decreased by $68,000 in the twelve months ended December 31,2008 when compared with the 2007 levels as the Company discontinued selling ahigh volume of residential mortgages during the second quarter of 2007.  Gains on sales of investments decreased$51,000 for the twelve months ended December 2008 as the Bank sold fewersecurities in 2008. Other noninterest income decreased by $122,000 for thetwelve months ended December 31, 2008, primarily as a result of the Bankreceiving a reduced rate on the funds held at a third party check processor aswell as the Bank discontinuing that relationship in the third quarter of2008.    Finally, for 2008, the reductionin service charges and other fee income was primarily a result of the Bankrecording a valuation allowance of $133,000 on its mortgage servicing rights,of which $102,000 was recorded in the three months ended December 31,2008. This was due to a significant decrease in interest rates in the fourthquarter of 2008 for residential mortgages, resulting in assumed higher mortgageprepayments.

 

***2007 vs. 2006*****.**   Noninterestincome increased $623,000 for 2007.  Theincrease for the twelve months ended December 2007 was primarily due to an$875,000 gain on sale of the Bank’s operations center in the second quarter of2007 and a $97,000 gain on sale of land during the fourth quarter of 2007. TheCompany also recorded gains on the sale of investment securities of $169,000 in2007 compared to a loss on the sale of investment securities of $17,000 for2006.  Gains on sales of loans decreasedby $121,000 in 2007, primarily as a result of the Company’s decision to stopselling such loans beginning in the second quarter of 2007.  These gains were offset by a reduction inservice charges and other fee income of $296,000 between comparabletwelve-month periods as 2006 included a significant level of past due loan feesfrom nonperforming loans were collected during that year.

 

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***Noninterest Expense.***  The followingtable shows the components of noninterest expense and the percentage changesfor 2008, 2007 and 2006.

** **
| ** **                                 | ** ** | **Years Ended December 31,** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **$ Change** | ** ** | **% Change**  | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|--------------|------------|-------------------|------------|---------------|------------|
| ** **                                 | ** ** | **2008**                          | ** ** | **2007**          | ** ** | **2006**     | ** ** | **2008/2007**     | ** ** | **2007/2006** | ** ** |
|                                       |       | **(In thousands)**                |       |              |       |         |       |              |       |          |       |
|                                       |       |                              |       |              |       |         |       |              |       |          |       |   |   |   |   |
| Salaries,  benefits and other compensation |       | $                                 | 11,313     |              | $          | 9,949        |       | $                 | 9,194      |          | $          | 1,364 |   | 13.7 | % | $ | 755 |   | 8.2 | % |
| Occupancy  expense                         |       | 1,879                             |       | 1,828             |       | 1,496        |       | 51                |       | 2.8           | %          | 332 |   | 22.2 | % |
| Furniture and  equipment expense           |       | 899                               |       | 940               |       | 1,060        |       | (41               | )          | (4.4          | )%         | (120 | ) | (11.3 | )% |
| Data processing  costs                     |       | 1,610                             |       | 1,537             |       | 1,514        |       | 73                |       | 4.7           | %          | 23 |   | 1.5 | % |
| Professional  fees                         |       | 1,124                             |       | 1,846             |       | 1,781        |       | (722              | )          | (39.1         | )%         | 65 |   | 3.6 | % |
| Marketing  expense                         |       | 463                               |       | 645               |       | 621          |       | (182              | )          | (28.2         | )%         | 24 |   | 3.9 | % |
| FDIC premiums                              |       | 176                               |       | 84                |       | 796          |       | 92                |       | 109.5         | %          | (712 | ) | (89.4 | )% |
| Contribution to  charitable foundation     |       | —                            |       | —            |       | 1,500        |       | —            |       | 0.0           | %          | (1,500 | ) | (100.0 | )% |
| Other                                      |       | 1,484                             |       | 1,859             |       | 1,905        |       | (375              | )          | (20.2         | )%         | (46 | ) | (2.4 | )% |
|                                       |       |                              |       |              |       |         |       |              |       |          |       |   |   |   |   |   |   |   |   |   |
| Total  Noninterest Expense                 |       | $                                 | 18,948     |              | $          | 18,688       |       | $                 | 19,867     |          | $          | 260 |   | 1.4 | % | $ | (1,179 | ) | (5.9 | )% |

 

***2008 vs. 2007.***  In 2008, noninterest expense increased$260,000, or 1.4%.  The increase innoninterest expense for the twelve month period was primarily a result ofincreased salaries and benefits costs of $1.4 million associated with awardsgranted under the Company’s 2007 Equity Incentive Plan, final distributionsfrom the Company’s terminated pension plan, costs associated with the openingof the Bank’s West Chester, Pennsylvania branch in October 2007 and theestablishment of a regional lending group in Ocean City, New Jersey in March 2008,as well as annual merit increases. Additionally, FDIC premiums increased $92,000 as the FDIC one-timecredit was fully utilized during 2008. We expect that our premiums will increase in 2009 (see “*Regulation and Supervision**— Insurance of Deposit Accounts”*).  These increases were offset by: (1) adecrease in professional fees of $722,000 due to lower levels of Sarbanes-Oxley(“SOX”) compliance expenses and audit related costs as 2007 was the Company’sinitial year of SOX compliance, and lower levels of legal costs primarily dueto legal fees paid in the first quarter of 2007 in relation to the litigationwith the Bank’s former Chief Executive Officer, which was settled in the fourthquarter of 2007; (2) a decrease in marketing expense of $182,000 due toreduced promotional offers and advertising; and (3) a decrease in othernoninterest expense of $375,000 primarily due to the Company paying asettlement of $150,000 to its former Chief Executive Officer in the fourthquarter of 2007 and reductions in public company costs, insurance, and postageand freight as the Company continued its disciplined focus on reducing otherexpenses.

 

***2007 vs. 2006.***  In 2007, noninterest expense decreased $1.2million, or 5.9%.  Salaries and benefitcosts increased $755,000, primarily as a result of (1) a full year ofexpense associated with the hiring of a team of experienced commercial lendersand commercial credit staff in the spring of 2006, (2) four months ofexpenses, or $271,000, associated with the awards granted under the Company’s2007 Equity Incentive Plan and (3) personnel expense associated with theBank opening its eleventh full-service branch in West Chester, Pennsylvania in September 2007.  Occupancy expense increased $332,000 duringthe twelve months ended December 31, 2007, primarily as a result of theCompany moving its operations center to a new location in the second quarter of2007 and the opening of the Bank’s West Chester branch.  Furniture and equipment expense decreased$120,000 primarily a result of an increase in 2006 expense associated withadjustments made to certain assets useful lives. Professional fees increased by$65,000 primarily as a result of incremental costs associated with our firstyear of implementation of SOX controls and procedures, partially offset bylower legal costs associated with strategic initiatives performed in 2006. Theremainder of the decrease in noninterest expense for the year was attributableto the $1.5 million contribution to the Fox Chase Bank Charitable Foundation inthe third quarter of 2006 and a decrease of $712,000 in FDIC insurance premiumsdue to the lifting of the Bank’s Cease and Desist order by the Office of ThriftSupervision on June 28, 2006.

 

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***Income Taxes.***

 

***2008 vs. 2007.***Income tax expense for2008 was $165,000 compared to $460,000 for 2007. The decrease in 2008 wasprimarily due to a $1.0 million decrease in pre-tax income.  The effective tax rate for 2008 and 2007 was12.0% and 19.2%, respectively.   Theeffective tax rate in 2008 was lower then the statutory federal tax rate of34.0% primarily due to the Company having tax-exempt interest income of $613,000and tax-exempt bank-owned life insurance income of $452,000.

 

***2007 vs. 2006.***Income tax expense for2007 was $460,000 compared to $684,000 for 2006. The decrease in 2007 wasprimarily due to a $1.9 million decrease in pre-tax income.  The effective tax rate for 2007 and 2006 was19.2% and 15.8%, respectively.   Theeffective tax rate in 2007 was lower then the statutory federal tax rate of34.0% primarily due to the Company having tax-exempt interest income of$924,000 and tax-exempt bank-owned life insurance income of $438,000.  The twelve-month period ended December 31,2006 included the Company’s reversal of a valuation allowance of $312,000 thatit had established in prior periods for possible non-realizable deferred taxasset benefits associated with certain capital loss carryforwards.

 

**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 Risk Management.***  Our strategy for credit risk managementfocuses on having well-defined credit policies and uniform underwritingcriteria and providing prompt attention to potential problem loans.  Historically, this strategy also emphasizesthe origination of one- to four-family mortgage loans, which typically havelower default rates than other types of loans and are secured by collateralthat has historically tended to appreciate in value. Beginning in 2007, thisstrategy was expanded to include our credit management policies andunderwriting criteria surrounding the commercial loan portfolio.

 

When a borrower fails to make a required loan payment,we take a number of steps to attempt to have the borrower cure the delinquencyand restore the loan to current status. When the loan becomes 15 days past due,a late notice is generated and sent to the borrower.  A second notice is sent and phone calls aremade ten days later. If payment is not received by the 30th day of delinquency, a further notification issent to the borrower.  If payment is notreceived by the 45th day of delinquency for a loan on a Pennsylvaniaproperty 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 or subsequent toforeclosure. We also may consider loan workout arrangements with certainborrowers under certain circumstances.

 

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.

 

***Analysis of Nonperforming 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 any previously recorded interest is reversedand recorded as a reduction of loan interest and fee income. Typically,payments received on a nonaccrual loan are applied to the outstanding principaland interest as determined at the time of collection of the loan.

 

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Real estate that we acquire as a result of foreclosureor by deed-in-lieu of foreclosure are classified as foreclosed assets until itis sold. When property is acquired, it is initially recorded at the lower ofits cost or market value, less estimate selling expenses. Holding costs anddeclines in fair value after acquisition of the property result in chargesagainst income.

 

The following table provides information with respectto our nonperforming assets at the dates indicated.  We did not have any troubled debtrestructurings at the dates presented.

** **
| ** **                                                                             | ** ** | **At December 31,**        | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                             | ** ** | **2008**                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                             | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                   |       |                                 |       |   |   |   |   |   |   |   |   |
| Nonaccrual  loans:                                                                     |       |                                 |       |   |   |   |   |   |   |   |   |
| One- to  four-family                                                                   |       | $                                    | 1,503      |   | $ | 155 |   | $ | 284 |   | $ | 548 |   | $ | 1,442 |   |
| Multi-family and  commercial real estate                                               |       | 685                                  |       | 105 |   | — |   | 2,972 |   | — |   |
| Construction                                                                           |       | 3,495                                |       | — |   | — |   | — |   | — |   |
| Consumer                                                                               |       | 167                                  |       | — |   | — |   | — |   | — |   |
| Total                                                                                  |       |                                 | 5,850      |   | 260 |   | 284 |   | 3,520 |   | 1,442 |   |
|                                                                                   |       |                                 |       |   |   |   |   |   |   |   |   |
| Accruing loans  past due 90 days or more:                                              |       |                                 |       |   |   |   |   |   |   |   |   |
| One- to  four-family                                                                   |       | —                               |       | 559 |   | — |   | — |   | — |   |
| Multi-family and  commercial real estate                                               |       | —                               |       | — |   | 2,941 |   | 1,574 |   | — |   |
| Total                                                                                  |       | —                               |       | 559 |   | 2,941 |   | 1,574 |   | — |   |
| Total of  nonaccrual loans and accruing loans 90 days or more past due                 |       | $                                    | 5,850      |   | $ | 819 |   | $ | 3,225 |   | $ | 5,094 |   | $ | 1,442 |   |
|                                                                                   |       |                                 |       |   |   |   |   |   |   |   |   |
| Real estate  owned                                                                     |       | —                               |       | — |   | — |   | 107 |   | — |   |
|                                                                                   |       |                                 |       |   |   |   |   |   |   |   |   |
| Total  nonperforming assets                                                            |       | $                                    | 5,850      |   | $ | 819 |   | $ | 3,225 |   | $ | 5,201 |   | $ | 1,442 |   |
|                                                                                   |       |                                 |       |   |   |   |   |   |   |   |   |
| Total  nonperforming loans and accruing loans past due 90 days or more to total  loans |       | 0.98                                 | %          | 0.18 | % | 0.90 | % | 1.36 | % | 0.29 | % |
| Total  nonperforming loans to total assets                                             |       | 0.63                                 |       | 0.10 |   | 0.43 |   | 0.65 |   | 0.16 |   |
| Total  nonperforming assets to total assets                                            |       | 0.63                                 |       | 0.10 |   | 0.43 |   | 0.67 |   | 0.16 |   |

 

At December 31, 2008, the largest nonaccrual loanwas a $3.5 million construction loan collateralized by a residential housingdevelopment located in southern New Jersey. At December 31, 2008, there were no accruing loans past due 90 daysor more.  At December 31, 2007,accruing loans past due 90 days or more consisted of a $505,000 residentialmortgage loan and a $54,000 home equity loan to one borrower.  The loans are secured by a residentialproperty in the southern New Jersey shore area.

 

Interest income that would have been recorded for theyear ended December 31, 2008 had nonaccruing loans been current accordingto their original terms was approximately $414,000.  Interest income included in net income forthese loans for the year ended December 31, 2008 was $244,000.

 

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 them tobe classified. There are three classifications for problem assets: substandard,doubtful and loss. “Substandard assets” must have one or more definedweaknesses and are characterized by the distinct possibility that we willsustain some loss if the deficiencies are not corrected. “Doubtful assets” havethe weaknesses of substandard assets with the additional characteristic thatthe weaknesses make collection or liquidation in full on the basis of currentlyexisting facts, conditions and values questionable, and there is a highpossibility of loss. An asset classified “loss” is considered uncollectible andof such little value that continuance as an asset of the institution is notwarranted. The regulations also provide for a “special mention” category, describedas assets which do not currently expose us to a sufficient degree of risk towarrant classification but do possess credit deficiencies or potentialweaknesses deserving our close 

 

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attention.  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,** | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|
| ** **                              | ** ** | **2008**                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                              | ** ** | **(In thousands)**       | ** ** |
|                                    |       |                          |       |   |   |   |   |
| Special mention  assets                 |       | $                             | 22,472     |   | $ | 1,648 |   | $ | 3,225 |   |
| Substandard  assets                     |       | 8,800                         |       | 559 |   | 5,764 |   |
| Doubtful assets                         |       | 200                           |       | — |   | — |   |
| Total criticized  and classified assets |       | $                             | 31,472     |   | $ | 2,207 |   | $ | 8,989 |   |

 

At December 31, 2008, the Bank had one loan classified as doubtfulin the amount of $200,000.  The loan is acommercial loan which is secured by a third lien position on commercial realestate located in a suburb of Philadelphia. The Bank is uncertain as to its ability to collect on this loan.

 

At December 31, 2008, the Bank had eight loans totaling $8.8million classified as substandard.  Oneof these loans is a $3.5 million construction loan collateralized by aresidential housing development located in southern New Jersey and has a$624,000 specific loan loss reserve at December 31, 2008.  The second, a residential mortgage loantotaling $505,000 combined with a $54,000 home equity loan, both to oneborrower, had a specific reserve of $145,000 at December 31, 2008.  The remaining five substandard loans arecomprised of (1) a $1.8 million residential housing development located insoutheast Pennsylvania, (2) a $1.7 million condominium project located inPhiladelphia, Pennsylvania, (3) a $485,000 commercial real estate loan and$231,000 residential mortgage loans, both to one borrower, located in southernNew Jersey and (4) $516,000 commercial real estate loan located in the NewJersey shore area.

 

At December 31, 2008, the Bank had 17 loans totaling $22.5 millionof special mention loans.  Such amount iscomprised of nine commercial real estate, construction and commercial loanstotaling $21.6 million, six residential mortgage loans totaling $767,000 andtwo home equity loans totaling $113,000. At December 31, 2007, the Bankhad two loans classified as substandard, one residential mortgage totaling$505,000 combined with a $54,000 home equity loan, both to one borrower, whichthe Bank recorded a specific reserve of $109,000 at December 31,2007.  Special mention assets included$1.1 million of commercial real estate loans, $500,000 of residential mortgageloans and one $44,000 home equity loan. The commercial real estate loans represent two separate borrowingrelationships which the Bank believes the borrowers have adequate collateral topay the loans upon liquidation. The residential mortgage loans were to fourdifferent borrowers. The Bank believes the borrowers have adequate collateralto pay the loans upon liquidation.

 

Other than as disclosed in the above tables, there areno other loans at December 31, 2008 that management has serious doubtsabout the ability of the borrowers to comply with the present loan repaymentterms.

 

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

** **
| ** **                               | ** ** | **At December 31,**  | ** ** |
|------------------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **2008**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                               | ** ** | **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)**        | ** ** |
|                                     |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Multi-family and  commercial real estate |       | $                              | 766        |   | $ | 337 |   | $ | 953 |   | $ | 146 |   | $ | — |   | $ | — |   |
| One- to  four-family real estate         |       | 104                            |       | 92 |   | 231 |   | 15 |   | 191 |   | — |   |
| Consumer:                                |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Home equity  loans and lines of credit   |       | 63                             |       | 83 |   | — |   | 53 |   | 23 |   | 24 |   |
| Automobile                               |       | —                         |       | — |   | — |   | 2 |   | — |   | — |   |
| Total                                    |       | $                              | 933        |   | $ | 512 |   | $ | 1,184 |   | $ | 216 |   | $ | 214 |   | $ | 24 |   |

 

At December 31,2008, the Bank has $1.4 million of delinquent loans comprised of ten differentloans, the largest being a $516,000 loan secured by commercial real estate inthe New Jersey shore area. This amount of delinquencies is at the same level asDecember 31, 2007.

 

***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 for loanlosses 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 toimplement and apply the risk rating documentation and, thus, its failure toadequately support its allowance for loan losses were deemed to be a materialweakness in connection 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.  A descriptionof the revised procedures for determining the allowance for loan losses iscontained below.

 

The allowance for loan losses is maintained at a levelrepresenting management’s best estimate of known and inherent losses in theloan portfolio, based upon management’s evaluation of the portfolio’scollectibility. We evaluate the need to establish allowances against losses onloans on a quarterly basis. When changes in the allowance are necessary, anadjustment is made.  The adjustments tothe allowance are made by management and presented to the Audit Committee ofthe Board of Directors.

 

Our methodology for assessing the appropriateness ofthe allowance for loan losses consists of a specific allowance on identifiedproblem loans and a general valuation allowance on the remainder of the loanportfolio. Although we determine the amount of each element of the allowanceseparately, the entire allowance for loan losses is available for the losses onentire portfolio.

 

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*SpecificAllowance Required for Identified Problem Loans.*  We establish an allowance on certainidentified problem loans based on such factors as: (1) the strength of thecustomer’s personal or business cash flows and personal guarantees; (2) theavailability of other sources of repayment; (3) the amount due or pastdue; (4) the type and value of collateral; (5) the strength of ourcollateral position; (6) the estimated cost to sell the collateral; and (7) theborrower’s effort to cure the delinquency. As of December 31, 2008, we had a specific reserve of $624,000related to a $3.5 million construction loan collateralized by a residentialhousing development located in southern New Jersey and a $145,000 specificreserve on a $505,000 residential mortgage loan and a $54,000 home equity loanto one borrower which are secured by a residential property in southern NewJersey.  Total specific reserves at December 31,2008 were $769,000.

 

*GeneralValuation Allowance on the Remainder of the Loan Portfolio.*  We establish a general allowance for loans (1) thatare classified, but no specific reserve is considered necessary and (2) thatare not classified, to recognize the inherent losses associated with lendingactivities. This general valuation allowance is determined by segregating theloans by loan category and assigning percentages to each category. Thepercentages are adjusted for significant factors that, in management’sjudgment, affect the collectibility of the portfolio as of the evaluation date.These significant factors may include loss experience in particular segments ofthe portfolio, trends and absolute levels of classified and criticized loans,trends and absolute levels in delinquent loans, trends in risk ratings, trendsin industry charge-offs by particular segments and changes in existing generaleconomic and business conditions affecting our lending areas and the nationaleconomy.  These loss factors are subjectto ongoing evaluation to ensure their relevance in the current economicenvironment. We perform this systematic analysis of the allowance on aquarterly basis.

 

The allowance for loan losses was influenced byseveral items in 2008. During the three months ended June 30, 2008,management refined its methodology for determining its loss factors for newcommercial loans.  Under thismethodology, management reviews and provides a loss factor for each individualnew loan relationship.  Generally, managementbelieves the risk of default on recently underwritten loans is relatively lowat the time of origination. This is supported by the concept that the fairvalue of the loan at inception approximates its book value.  However, based on its industry experience,management believes the default risk on loans is initially low, increases withtime, at some point moderating.  Newcommercial loans are reviewed on a quarterly basis, and loss reserve factorsadjusted commensurate with assessed changes in the loan’s risk.  The increase in allowance also reflects: (1) anincrease in specific reserves of $660,000 related to two borrowingrelationships previously discussed. (2) $29.3 million increase in loansclassified as doubtful, substandard or special mention, which loans receive ahigher loss reserve factor than non-classified loans; and (3) increasedloss factors for non-classified loans in the construction loan portfolio due tothe deteriorating economic environment.

 

We also identify loans that may need to be charged offas a loss by reviewing all delinquent loans, classified and criticized loansand other loans that 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 could result in an increase in the allowance for loan losses.

 

At December 31, 2008our allowance for loan losses represented 1.05% of total loans and 107.0% ofnonperforming loans.  At December 31,2008 the allowance for loan losses was $6.3 million, of which $769,000 wasspecific reserves for identified loans and $5.5 million was a general valuationallowance for the loan portfolio. This compares to an allowance for loan lossesof $3.4 million at December 31, 2007. The increase in 2008 was substantially related to deterioration in thedeterioration in the national and local economy, which had a significant impacton the residential housing market. The allowance for loan losses at December 31,2008 represents application of loan loss policies, which comply with U.S.generally accepted accounting principles and all regulatory guidance.  The allowance for loan losses is impacted bythe previously discussed levels of specific and general required valuationallowances.  As such reserve levelschange, management will increase or decrease the allowance for loan losses asrequired to maintain adequate levels of reserves for losses inherent in itsloan portfolio.

 

At December 31, 2007our allowance for loan losses represented 0.75% of total loans and 412.2% ofnonperforming loans.  At December 31,2007 the allowance for loan losses was $3.4 million, of which $109,000 wasspecific reserves for identified loans and $3.3 million was a general valuationallowance for the loan portfolio.

 

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The following table setsforth the breakdown of the allowance for loan losses by loan category at thedates indicated.  The attribution in thetable of all of the allowance for loan losses to one-to four-family real estateloans in 2004 reflects former management’s: (1) decision to evaluate loan losses for home equity loans andlines of credit in the same manner as one-to four-family loans because theywere all collateralized by residential real estate; and (2) failure toadopt a risk rating system and update its allowance for loan losses analysis toaccount for the increase in multi-family and commercial real estate andconstruction loans that were originated in 2003 and 2004.  See *“—Analysisand Determination of the Allowance for Loan Losses — Historical Practice.”*

 
|                             |   | **At December 31,**        |       |
|----------------------------------|--------|--------------------------------------|------------|
|                             |   | **2008**                             |       | **2007** |   | **2006** |   | **2005** |   | **2004** |   |
|                             |   | **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             |   | $                                    | 542        |   | 43.8 | % | $ | 405 |   | 47.9 | % | $ | 798 |   | 58.3 | % | $ | 607 |   | 60.9 | % | $ | 14,391 |   | 50.1 | % |
| Multi-family and  commercial     |   | 2,220                                |       | 26.2 |   | 1,245 |   | 16.9 |   | 784 |   | 12.4 |   | 2,544 |   | 8.8 |   | — |   | 17.2 |   |
| Construction                     |   | 2,449                                |       | 10.9 |   | 872 |   | 10.3 |   | 318 |   | 3.2 |   | 4,640 |   | 8.3 |   | — |   | 18.5 |   |
| Consumer loans:                  |   |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Home equity                      |   | 337                                  |       | 10.7 |   | 329 |   | 15.2 |   | 257 |   | 20.5 |   | 316 |   | 17.3 |   | — |   | 9.9 |   |
| Automobile                       |   | 8                                    |       | 0.1 |   | 18 |   | 0.1 |   | 37 |   | 0.3 |   | 46 |   | 0.3 |   | — |   | 0.4 |   |
| Home equity  lines of credit     |   | 9                                    |       | 1.9 |   | 5 |   | 2.1 |   | 38 |   | 2.9 |   | — |   | 4.3 |   | — |   | 3.6 |   |
| Other                            |   | 16                                   |       | 0.1 |   | 11 |   | 0.1 |   | 3 |   | 0.1 |   | — |   | 0.1 |   | — |   | 0.3 |   |
| Commercial                       |   | 577                                  |       | 6.3 |   | 486 |   | 7.4 |   | 446 |   | 2.3 |   | 18 |   | — |   | — |   | — |   |
| Unallocated                      |   | 102                                  |       | — |   | 5 |   | — |   | 268 |   | — |   | 178 |   | — |   | — |   | — |   |
|                             |   |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total allowance  for loan losses |   | $                                    | 6,260      |   | 100.0 | % | $ | 3,376 |   | 100.0 | % | $ | 2,949 |   | 100.0 | % | $ | 8,349 |   | 100.0 | % | $ | 14,391 |   | 100.0 | % |

 

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Although we believe thatwe use the best information available to establish the allowance for loanlosses, future adjustments to the allowance for loan losses may be necessaryand our results of operations could be adversely affected if circumstancesdiffer substantially from the assumptions used in making the determinations.Furthermore, while we believe we have established our allowance for loan lossesin conformity with U.S. generally accepted accounting principles, there can beno assurance that the Office of Thrift Supervision, in reviewing our loanportfolio, will not request us to increase our allowance for loan losses.  The Office of Thrift Supervision may requireus to increase our allowance for loan losses based on judgments different fromours.  In addition, because future eventsaffecting borrowers and collateral cannot be predicted with certainty, therecan be no assurance that increases will not be necessary should the quality ofany loans deteriorate as a result of the factors discussed above. Any materialincrease in the allowance for loan losses may adversely affect our financialcondition 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,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(Dollars in thousands)**       | ** ** |
|                                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Allowance at  beginning of period                                                  |       | $                                          | 3,376      |   | $ | 2,949 |   | $ | 8,349 |   | $ | 14,391 |   | $ | 2,109 |   |
| Charge-offs:                                                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Consumer                                                                           |       | 19                                         |       | 2 |   | 8 |   | 17 |   | — |   |
| Total  charge-offs                                                                 |       | 19                                         |       | 2 |   | 8 |   | 17 |   | — |   |
|                                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Recoveries                                                                         |       | 3                                          |       | 4 |   | 2 |   | — |   | — |   |
| Net charge offs  (recoveries)                                                      |       | 16                                         |       | (2 | ) | 6 |   | 17 |   | — |   |
| Provision (credit)  for loan losses                                                |       | 2,900                                      |       | 425 |   | (5,394 | ) | (6,025 | ) | 12,282 |   |
| Allowance at end  of period                                                        |       | $                                          | 6,260      |   | $ | 3,376 |   | $ | 2,949 |   | $ | 8,349 |   | $ | 14,391 |   |
|                                                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Allowance for  loan losses to nonperforming loans and troubled debt restructurings |       | 107.0                                      | %          | 412.2 | % | 91.4 | % | 163.9 | % | 998.0 | % |
| Allowance for  loan losses to total loans at the end of the period                 |       | 1.05                                       |       | 0.75 |   | 0.82 |   | 2.22 |   | 2.89 |   |
| 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.

As of December 31, 2008, we had $141.7 million ofloans that were floating or adjustable rate. Core deposits will typically reprice at the same rate as interest ratesincrease while certificates of deposits typically will reprice slower due toduration to maturity.  Due to our levelof floating-rate loans and core deposits, we believe our earnings would not benegatively impacted by sharp  increasesin interest rates.  As the Federal Fundsrate is only 100 basis points at December 31, 2008, we do not believe thata sharp decrease in interest rates is likely.

 

To reduce the volatility of our earnings, we havesought to improve the match between asset and liability maturities and rates,while maintaining an acceptable interest rate spread. Our strategy for managinginterest rate risk generally involves emphasizing the origination ofshorter-term adjustable-rate loans, and investing in securities that haveadjustable-rates or shorter terms. Additionally, we have focused on increasingmoney market deposit accounts, which provide greater pricing flexibility, as wellas making efforts to extend maturities on certificates of deposit and wholesaleborrowings to better match longer-term fixed rate assets. We currently do notparticipate in systemic hedging programs, interest rate swaps or otheractivities involving the use of derivative financial instruments, except thatas of December 31, 2008, the Bank had one interest rate swap in thenotional amount of $1.2 million to hedge a 15-year fixed rate loan which wasearning interest at 7.43%.  The Bank isreceiving a variable rate payment of three-month LIBOR plus 2.24% and will payfixed rate payments of 7.43%. The swap matures in April 2022 and had amarket value loss position of $236,000 and $60,000 at December 31, 2008and 2007, respectively.  

 

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We have a Risk Management Committee, which togetherwith an Asset/Liability Management Committee, communicates, coordinates and controlsall aspects involving asset/liability management. The committee establishes andmonitors the volume, maturities, pricing and mix of assets and funding sourceswith the objective of managing assets and funding sources to provide resultsthat are consistent with liquidity, growth, risk limits and profitabilitygoals.

 

Our goal is to manage asset and liability positions tomoderate the effects of interest rate fluctuations on net interest income andnet income.

 

***Net Portfolio Value Analysis.*** We use anet portfolio value analysis 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 assumedchanges in market interest rates. Net portfolio value represents the marketvalue of portfolio equity and is equal to the market value of assets minus themarket value of liabilities, with adjustments made for off-balance sheet items.These analyses assess the risk of loss in market risk-sensitive instruments inthe event of a sudden and sustained 50 to 300 basis point increase or 50 and100 basis point decrease in market interest rates with no effect given to anysteps that 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 100 basis points.  The internal model differs from that preparedby the Office of Thrift Supervision as it assumes:  (1) slower prepayments for fixed-rateone- to four-family loans; and (2) a longer duration for transactionaccounts.  Notwithstanding the differentassumptions, 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 the net portfolio value of the Bank at September 30,2008 (the latest date for which the information is available) that would occurin the event of an immediate change in interest rates based on Office of ThriftSupervision assumptions, with no effect given to any steps that we might taketo counteract that change.

 
| **Basis Point (“bp”)** | ** ** | **Net Portfolio Value**    | ** ** | **Net Portfolio Value as % of  Portfolio Value of Assets** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| **Change in Rates**              | ** ** | **Amount**                           | ** ** | **Change**                                                                                    | ** ** | **% Change** | ** ** | **NPV Ratio** | ** ** | **Change (bp)** | ** ** |
| ** **                                 | ** ** | **(Dollars in thousands)** | ** ** |
|                                       |       |                                 |       |                                                                                          |       |   |   |   |   |   |   |
| 300                                        |       | $                                    | 67,792     |                                                                                          | (38,297    | ) | (36 | )% | 7.99 | % | (371 | ) |
| 200                                        |       | 82,409                               |       | (23,680                                                                                       | )          | (22 | ) | 9.49 |   | (222 | ) |
| 100                                        |       | 95,726                               |       | (10,363                                                                                       | )          | (10 | ) | 10.78 |   | (93 | ) |
| 50                                         |       | 101,273                              |       | (4,816                                                                                        | )          | (5 | ) | 11.28 |   | (42 | ) |
| 0                                          |       | 106,089                              |       |                                                                                          |       |   |   | 11.71 |   |   |   |
| (50)                                       |       | 108,999                              |       | 2,910                                                                                         |       | 3 |   | 11.93 |   | 22 |   |
| (100)                                      |       | 111,274                              |       | 5,185                                                                                         |       | 5 |   | 12.09 |   | 38 |   |
|                                            |            |                                      |            |                                                                                               |            |  |  |  |  |  |  |  |

 

The decrease in our net portfolio value shown in thepreceding table that would occur upon an increase in prevailing market interestrates and the increase in our net portfolio value that would occur upon adecrease in market rates reflects: (1) that a substantial portion of ourinterest earning assets are fixed-rate residential loans and fixed rateinvestment securities; and (2) the shorter duration of deposits, whichreprice more frequently in response to changes in market interest rates.

 

The Office of Thrift Supervision uses variousassumptions in assessing interest rate risk. These assumptions relate tointerest rates, loan prepayment rates, deposit decay rates and the marketvalues of certain assets under differing interest rate scenarios, among others.As with any method of measuring interest rate risk, certain shortcomings areinherent in the methods of analyses presented in the foregoing tables. Forexample, although certain assets and liabilities may have similar maturities orperiods to repricing, they may react in different degrees to changes in marketinterest rates. Also, the interest rates on certain types of assets andliabilities may fluctuate in advance of changes in market interest rates, whileinterest rates on other types may lag behind changes in market rates.Additionally, certain assets, such as adjustable-rate mortgage loans, havefeatures that restrict changes in interest rates on a short-term basis and overthe life of the asset. Further, in the event of a change in interest rates,expected rates of prepayments on loans and early withdrawals from certificatescould deviate significantly from 

 

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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 beno assurance that assumed prepayment rates will approximate actual futuremortgage-backed security and loan repayment activity.

 

***Liquidity Management*.**   Liquidity is the ability to meet currentand future financial obligations of a short-term nature. Our primary sources offunds consist of deposit inflows, wholesale borrowings, loan repayments andmaturities and liquidation and sales of securities. While maturities andscheduled amortization of loans and securities are predictable sources offunds, deposit flows and loan prepayments are greatly influenced by generalinterest rates, economic conditions and competition.

 

We regularly adjust our investments in liquid assetsbased upon our assessment of:  (1) expectedloan demands; (2) expected deposit flows; (3) yields available oninterest-earning deposits and securities; and (4) the objectives of ourasset/liability management policy.  Weuse a variety of measures to assess our liquidity needs, which are provided toour Asset/Liability Management Committee on a regular basis.  Our policy is to maintain net liquidity of atleast 50% of our funding obligations over the next month.  Additionally, our policy is to maintain anamount of cash and short-term marketable securities equal to at least 15% ofnet deposits and liabilities that 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$3.9 million at December 31, 2008. Securities classified asavailable-for-sale, which provide additional sources of liquidity, totaled$294.7 million at December 31, 2008. In addition, at December 31, 2008, we had the ability to borrow atotal of approximately $481.7 million from the Federal Home Loan Bank ofPittsburgh, of which we had $146.4 million outstanding.

 

At December 31, 2008, we had $91.8 million inloan commitments outstanding, which consisted of $800,000 of mortgage loancommitments, $23.9 million in home equity and consumer loan commitments, $67.1million in commercial loan commitments and $3,000 standby letters ofcredit.  Certificates of deposit duewithin one year of December 31, 2008 totaled $200.2 million, representing53.5% of certificates of deposit at December 31, 2008.  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, 2009. Webelieve, 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.

 

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The followingtable presents certain of our contractual obligations as of December 31,2008.

** **
| ** **                              | ** ** | **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)        |       | $                                         | 1,702      |   | $ | 498 |   | $ | 929 |   | $ | 275 |   | $ | — |   |
| FHLB advances  and other borrowings (2) |       | 238,197                                   |       | 16,260 |   | 61,237 |   | 32,221 |   | 128,479 |   |
| Other long-term  obligations (3)        |       | 7,443                                     |       | 1,651 |   | 3,131 |   | 2,661 |   | — |   |
| Total                                   |       | $                                         | 247,342    |   | $ | 18,409 |   | $ | 65,297 |   | $ | 35,157 |   | $ | 128,479 |   |

 

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(1)                      Represents lease obligations for theBank’s operations center, one commercial loan production office and equipment.

(2)                      Includes principal and projectedinterest payments.

(3)                      Represents obligations to theCompany’s third party data processing providers and other vendors. The Companyrenegotiated its third party data processing agreement during February 2009.  The new agreement has a term of five yearsfrom 2009 to 2013.

 

Our primary investing activities are the originationand sale of loans and the purchase and sale of securities. Our primaryfinancing activities consist of activity in deposit accounts and borrowedfunds. Deposit flows are affected by the overall levels of interest rates, theinterest rates and products offered by us and our local competitors and otherfactors. We generally manage the pricing of our deposits to be competitive andto increase core deposit relationships. Occasionally, we offer promotional rateson certain deposit products to attract deposits.

 

The following table presents our primary investing andfinancing activities during the periods indicated.

 

| ** **                                           | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| ** **                                           | ** ** | **(In thousands)**                    | ** ** |
| Investing  activities:                               |       |                                       |       |   |   |
| Loan originations                                    |       | $                                          | (207,687   | ) | $ | (193,870 | ) |
| Other decreases  in loans                            |       | 82,182                                     |       | 134,091 |   |
| Purchase of loan  participations                     |       | (19,335                                    | )          | (32,064 | ) |
| Security  purchases                                  |       | (163,303                                   | )          | (187,984 | ) |
| Security sales                                       |       | 94,449                                     |       | 36,268 |   |
| Security  maturities, calls and principal repayments |       | 68,893                                     |       | 86,128 |   |
| Financing  activities:                               |       |                                       |       |   |   |
| Increases  (decreases) in deposits                   |       | 22,912                                     |       | (10,974 | ) |
| Net increase in  FHLB advances                       |       | 66,379                                     |       | 50,000 |   |
| Increase in  other borrowings                        |       | 30,000                                     |       | 20,000 |   |
|                                                      |            |                                            |            |  |  |  |  |

 

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***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, 2008, we exceeded all ofour regulatory capital requirements.  Weare considered “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 thisReport.  In addition, due in part to itssufficient capital level, the Company did not participate in the U.S.Government sponsored Troubled Asset Relief Program (“TARP”).

 

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 has reduced as net proceeds from the stockoffering were used for general corporate purposes, including the funding oflending activities. Our financial condition and results of operations have beenenhanced 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 had, and for some period oftime will have, an adverse impact on our return on equity. In the future, wemay use capital management tools such as additional common stock repurchasesand cash dividends.

 

***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 12 of the notes to the consolidated financialstatements. We currently have one hedge of a fixed-rate fifteen year $1.2million loan, which provides for the Bank to receive variable rate funds andpay fixed rate funds. We currently have no additional plans to engage inhedging activities in the future.

 

For the yearsended December 31, 2008 and 2007, we engaged in no off-balance sheettransactions reasonably likely to have a material effect on our financialcondition, results of operations or cash flows.

 

**Impactof Recent Accounting Pronouncements**

 

The informationrequired by this item is included in Note 17 to the consolidated financialstatements beginning on page F-2.

 

**Effectof Inflation and Changing Prices**

 

The financialstatements and related financial data presented in this annual report have beenprepared in accordance with U.S. generally accepted accounting principles,which require the measurement of financial condition 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*.”

 

**ITEM 8.                  FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

Informationrequired by this item is included herein beginning on page F-2.

 

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**ITEM 9.****                 CHANGESIN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**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’srules and forms, and (2) is accumulated and communicated to theCompany’s management, including its principal executive and principal financialofficers, as appropriate to allow timely decisions regarding requireddisclosure.

 

No change in theCompany’s internal control over financial reporting occurred during the quarterended December 31, 2008 that has materially affected, or is reasonablylikely to affect, the Company’s internal control over financial reporting.

 

Management’sreport on internal controls over financial reporting and KPMG LLP’s attestationreport on management’s assessment of the Company’s internal controls overfinancial reporting included on pages F-1 and F-3 of  this Annual Report on Form 10-K.

** **

**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 “*Items to be Voted on by Stockholders — Item 1 —Election of Directors*” in Fox Chase Bancorp’s Proxy Statement forthe 2009 Annual Meeting of Stockholders is incorporated herein by reference.

 

**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, thecover page to this Annual Report on Form 10-K and the sectioncaptioned *“Other Information Relating to Directors and ExecutiveOfficers - Section 16(a) Beneficial Ownership Reporting Compliance”*in Fox Chase Bancorp’s Proxy Statement for the 2009 Annual Meeting ofStockholders are incorporated herein by reference.

 

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**Disclosureof Code of Ethics**

 

For informationconcerning Fox Chase Bancorp’s code of ethics, the information contained underthe section captioned *“Corporate Governance andBoard Matters - Code of Ethics and Business Conduct”* in Fox ChaseBancorp’s Proxy Statement for the 2009 Annual Meeting of Stockholders isincorporated herein by reference.  A copyof the Company’s Code of Ethics and Business Conduct is available to stockholderson the Governance Documents portion of the Investors Relations section on FoxChase Bancorp’s website at www.foxchasebank.com.

 

**CorporateGovernance**

 

For informationregarding the audit committee and its composition and the audit committeefinancial expert, the section captioned *“Corporate Governance andBoard Matters — Committees of the Board of Directors — Audit Committee”*in Fox Chase Bancorp’s Proxy Statement for the 2009 Annual Meeting ofStockholders is incorporated herein by reference.

 

**ITEM 11.               EXECUTIVECOMPENSATION**

 

**ExecutiveCompensation**

 

For informationregarding executive compensation, the sections captioned *“CompensationDiscussion and Analysis,” “Executive Compensation”*and*“Corporate Governance and Board Matters - Director Compensation”*in Fox Chase Bancorp’s Proxy Statement for the 2009 Annual Meeting ofStockholders are incorporated herein by reference.

 

**CorporateGovernance**

 

For informationregarding the compensation committee report, the section captioned *“Report of the Compensation Committee”* in Fox Chase Bancorp’sProxy Statement for the 2009 Annual Meeting of Stockholders is incorporatedherein by reference.

 

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**ITEM 12.****               SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS**

 

(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 2009Annual 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 2009Annual 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 Compensation Plan Information

 

The followingtable sets forth information about the Company common stock that may be issuedupon the exercise of stock options, warrants and rights under all of theCompany’s equity compensation plans as of December 31, 2008.

 
| **Plan category**                                      | ** ** | **(a)  Number of securities  to be issued upon exercise  of outstanding options,  warrants and rights** | ** ** | **(b)  Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **(c)  Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding securities  reflected in column (a))** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       | 615,200                                                                                                                                                   |       | $                                                                                                                | 12.22      |                                                                                                                                                                                                                  | 104,107    |   |
| Equity  compensation plans not approved by security holders |       | —                                                                                                                                                    |       | —                                                                                                           |       |                                                                                                                                                                                                                  |       |
| Total                                                       |       | 615,200                                                                                                                                                   |       | $                                                                                                                | 12.22      |                                                                                                                                                                                                                  | 104,107    |   |

 

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

 

**CertainRelationships and Related Transactions**

 

For informationregarding certain relationships and related transactions, the sectionscaptioned “*Other Information Relating toDirectors and Executive Officers — Policies and Procedures Governing  Related Persons Transactions*” and *“Transactions with Related Persons”* in Fox Chase Bancorp’sProxy Statement for the 2009 Annual Meeting of Stockholders is incorporatedherein by reference.

 

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**CorporateGovernance**

 

For informationregarding director independence, the section captioned *“CorporateGovernance and Board Matters — Director Independence”* in Fox ChaseBancorp’s Proxy Statement for the 2009 Annual Meeting of Stockholders isincorporated herein by reference.

 

**ITEM 14.               PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

For informationregarding the principal accountant fees and expenses the section captioned  *“Audit-RelatedMatters — Audit Fees and Policy on Audit Committee Pre-Approval of Audit andPermissible Non-Audit Services of the Independent Registered Public AccountingFirm”* in Fox Chase Bancorp’s Proxy Statement for the 2009 AnnualMeeting of Stockholders is incorporated herein by reference.

# ** **

# **PART IV**

 

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

 

(1)           The financial statements required inresponse to this item are incorporated by reference 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. (2)                                                                                       |
| 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, as amended and restated          |
| 10.4    |       | *Employment Agreement between Jerry D. Holbrook, Fox  Chase Bancorp, Inc. and Fox Chase Bank, as amended and restated        |
| 10.5    |       | *Employment Agreement between Keiron G. Lynch, Fox  Chase Bancorp, Inc. and Fox Chase Bank, as amended and restated          |
| 10.6    |       | *Employment Agreement between David C. Kowalek, Fox  Chase Bancorp, Inc. and Fox Chase Bank, as amended and restated         |
| 10.7    |       | *Change of Control Agreement between Richard J.  Fuchs, Fox Chase Bancorp, Inc. and Fox Chase Bank, as amended and  restated |
| 10.8    |       | *Fox Chase Bank  Executive Long-Term Incentive Plan (1)                                                                           |
| 10.9    |       | *Fox Chase Bank  Employee Severance Compensation Plan, as amended and restated (1)                                                |
| 10.10   |       | *Fox Chase  Bancorp, Inc. 2007 Equity Incentive Plan (3)                                                                     |
| 10.11   |       | *Employment Agreement  between Roger S. Deacon, Fox Chase Bancorp, Inc. and Fox Chase Bank                                   |
| 21.0    |       | List of Subsidiaries                                                                                                              |
| 23.1    |       | Consent of KPMG 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, Chief Financial Officer and Chief  Accounting Officer                |

 

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*              Management contract orcompensatory plan, contract or arrangement.

 

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(1)          Incorporated byreference in this document to the exhibits to the Company’s RegistrationStatement on Form S-1 (File No. 333-134160), as amended, initiallyfiled with the Securities and Exchange Commission on May 16, 2006.

(2)          Incorporated byreference into this document to the exhibit to the Company’s Current Report on Form 8-Kfiled with the Securities and Exchange Commission on October 24, 2007.

(3)          Incorporated byreference in this document to the appendix to the Company’s Definitive ProxyStatement filed with the Securities and Exchange Commission on April 12,2007.

 

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**Index to Consolidated FinancialStatements of Fox Chase Bancorp, Inc.**

 
|                                                                                                    | **Page** |
|---------------------------------------------------------------------------------------------------------|----------|
|                                                                                                    |     |
| Management’s Report on Internal Control Over Financial  Reporting                                  | F-1      |
|                                                                                                    |     |
| Reports  of Independent Registered Public Accounting Firm                                               | F-2      |
|                                                                                                    |     |
| Consolidated  Statements of Condition as of December 31, 2008 and 2007                             | F-4      |
|                                                                                                    |     |
| Consolidated Statements of Operations for the Years Ended  December 31, 2008, 2007 and 2006        | F-5      |
|                                                                                                    |     |
| Consolidated Statements of Changes in Equity for the Years  Ended December 31, 2008, 2007 and 2006 | F-6      |
|                                                                                                    |     |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2008, 2007 and 2006        | F-7      |
|                                                                                                    |     |
| Notes to Consolidated Financial Statements                                                              | F-8      |

 

*******

 

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***FOX CHASE BANCORP, INC.***

 

**Management’s Report onInternal Control Over Financial Reporting**

 

The management of FoxChase Bancorp, Inc. (the “Company”) is responsible for establishing andmaintaining adequate internal control over financial reporting.  The internal control process has beendesigned under our supervision to provide reasonable assurance regarding thereliability of financial reporting and the preparation of the Company’sfinancial statements for external reporting purposes in accordance with U.S.generally accepted accounting principles.

 

Management conducted anassessment of the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2008, utilizing the frameworkestablished in Internal Control — Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO).  Based on this assessment, management hasdetermined that the Company’s internal control over financial reporting as of December 31,2008 is effective.

 

Our internal control overfinancial reporting includes policies and procedures that pertain to themaintenance of records that accurately and fairly reflect, in reasonabledetail, transactions and dispositions of assets; and provide reasonableassurances that:  (1) transactionsare recorded as necessary to permit preparation of financial statements inaccordance with U.S. generally accepted accounting principles; (2) receiptsand expenditures are being made only in accordance with authorizations ofmanagement and the directors of the Company; and (3) unauthorizedacquisition, use, or disposition of the Company’s assets that could have amaterial effect on the Company’s financial statements are prevented or timelydetected.

 

All internal controlsystems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined tobe effective can provide only reasonable assurance with respect to financialstatement preparation and presentation. Also, projections of any evaluation of effectiveness to future periodsare subject to the risk that controls may become inadequate because of changesin conditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

 

KPMG LLP, an independentregistered public accounting firm, has audited the Company’s consolidated financialstatements as of and for the year ended December 31, 2008, and theeffectiveness of the Company’s internal control over financial reporting as of December 31,2008, as stated in their reports, which are included herein.

 

 
| /s/ Thomas M. Petro                    |   |
|----------------------------------------|--------|
| Thomas M. Petro                        |   |
| President and Chief  Executive Officer |   |
|                                   |   |
|                                   |   |
| /s/ Roger S. Deacon                    |   |
| Roger S. Deacon                        |   |
| Chief Financial Officer  and Secretary |   |
|                                   |   |
|                                   |   |
| March 12,  2009                   |   |

 

F-1

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***FOX CHASE BANCORP, INC.***

 

**Reportof Independent Registered Public Accounting Firm**

 

TheBoard of Directors and Stockholders

Fox Chase Bancorp, Inc.:

 

We have audited theaccompanying consolidated statements of condition of Fox Chase Bancorp, Inc.and subsidiary (the Company) as of December 31, 2008 and 2007, and therelated consolidated statements of operations, changes in equity, and cashflows for each of the years in the three-year period ended December 31,2008. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Fox Chase Bancorp, Inc. andsubsidiary as of December 31, 2008 and 2007, and the results of theiroperations and their cash flows for each of the years in the three-year periodended December 31, 2008, in conformity with U.S. generally acceptedaccounting principles.

 

As discussed in Note 1 tothe consolidated financial statements, the Company adopted Statement ofFinancial Accounting Standards No. 158, “Employers’ Accounting for DefinedBenefit Pensions and Other Post Retirement Plans,” effective December 31,2006, and as discussed in Notes 14 and 17 to the consolidated financialstatements, the Company adopted Statement of Financial Accounting Standards No. 159,“Fair Value Option for Financial Assets and Financial Liabilities,” effective January 1,2008.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the Company’s internal control over financial reporting as of December 31,2008, based on criteria established in *Internal Control —Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated March 12,2009 expressed an unqualified opinion on the effectiveness of the Company’sinternal control over financial reporting.

 

 
| /s/ KPMG LLP               |   |
|----------------------------|--------|
| Philadelphia, Pennsylvania |   |
| March 12, 2009        |   |

 

F-2

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# **Table of Contents**

 

***FOX CHASE BANCORP, INC.***

 

# **Report of Independent Registered Public AccountingFirm**

# ** **

The Board of Directorsand Stockholders

Fox Chase Bancorp, Inc.:

 

We have audited theinternal control over financial reporting of Fox Chase Bancorp, Inc. andsubsidiary (the Company) as of December 31, 2008, based on criteria established in *Internal Control - Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO)*.*The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting, included in the accompanying *Management’s Report on Internal Control Over Financial Reporting*.Our responsibility is to express an opinion on the Company’s internal control overfinancial reporting based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, and testing and evaluatingthe design and operating effectiveness of internal control based on theassessed risk. Our audit also included performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles.  Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Fox ChaseBancorp, Inc. and subsidiary maintained, in all material respects,effective internal control over financial reporting as of December 31,2008, based on criteria established in*Internal Control - Integrated Framework*issued by the COSO.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated statementsof condition of the Company as of December 31, 2008 and 2007, and therelated consolidated statementsof operations, changes in equity, and cash flows for each of the years in thethree-year period ended December 31, 2008, and our report dated March 12, 2009**expressed an unqualified opinion on those consolidated financial statements*.*

 

 
| /s/ KPMG LLP               |   |
|----------------------------|--------|
| Philadelphia, Pennsylvania |   |
| March 12,  2009       |   |

 

F-3

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***FOX CHASE BANCORP, INC.***

 

**CONSOLIDATEDSTATEMENTS OF CONDITION (INTHOUSANDS, EXCEPT SHARE DATA)**

 
| ** **                                                                                                                                                                                                                                    |   | **December 31,** |    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|---------|
| ** **                                                                                                                                                                                                                                    |   | **2008**              |    | **2007** |   |
| ** **                                                                                                                                                                                                                                    |   |                  |    |   |   |
| **ASSETS**                                                                                                                                                                                                                                    |   |                  |    |   |   |
|                                                                                                                                                                                                                                          |   |                  |    |   |   |
| Cash and due  from banks                                                                                                                                                                                                                      |   | $                     | 642     |   | $ | 3,307 |   |
| Interest-earning  demand deposits in other banks                                                                                                                                                                                              |   | 3,302                 |    | 7,968 |   |
| Money market  funds                                                                                                                                                                                                                           |   | —                |    | 20,000 |   |
| Total cash and  cash equivalents                                                                                                                                                                                                              |   | 3,944                 |    | 31,275 |   |
| Investment securities  available-for-sale                                                                                                                                                                                                     |   | 25,041                |    | 91,159 |   |
| Mortgage related  securities available-for-sale                                                                                                                                                                                               |   | 269,682               |    | 205,145 |   |
| Loans, net of  allowance for loan losses of $6,260 at December 31, 2008 and $3,376 at  December 31, 2007                                                                                                                            |   | 588,975               |    | 447,035 |   |
| Federal Home  Loan Bank stock, at cost                                                                                                                                                                                                        |   | 9,707                 |    | 5,875 |   |
| Bank-owned life  insurance                                                                                                                                                                                                                    |   | 12,214                |    | 11,762 |   |
| Premises and  equipment                                                                                                                                                                                                                       |   | 13,705                |    | 14,466 |   |
| Accrued interest  receivable                                                                                                                                                                                                                  |   | 3,721                 |    | 3,360 |   |
| Mortgage  servicing rights                                                                                                                                                                                                                    |   | 827                   |    | 1,066 |   |
| Deferred tax  asset, net                                                                                                                                                                                                                      |   | 1,869                 |    | 410 |   |
| Other assets                                                                                                                                                                                                                                  |   | 1,585                 |    | 1,366 |   |
| **Total  Assets**                                                                                                                                                                                                                             |   | $                     | 931,270 |   | $ | 812,919 |   |
| ** **                                                                                                                                                                                                                                    |   |                  |    |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                 |   |                  |    |   |   |
|                                                                                                                                                                                                                                          |   |                  |    |   |   |
| **LIABILITIES**                                                                                                                                                                                                                               |   |                  |    |   |   |
|                                                                                                                                                                                                                                          |   |                  |    |   |   |
| Deposits                                                                                                                                                                                                                                      |   | $                     | 608,472 |   | $ | 585,560 |   |
| Federal Home  Loan Bank advances                                                                                                                                                                                                              |   | 146,379               |    | 80,000 |   |
| Other borrowed  funds                                                                                                                                                                                                                         |   | 50,000                |    | 20,000 |   |
| Advances from  borrowers for taxes and insurance                                                                                                                                                                                              |   | 2,589                 |    | 2,374 |   |
| Accrued interest  payable                                                                                                                                                                                                                     |   | 727                   |    | 504 |   |
| Accrued expenses  and other liabilities                                                                                                                                                                                                       |   | 1,883                 |    | 2,110 |   |
| **Total  Liabilities**                                                                                                                                                                                                                        |   | 810,050               |    | 690,548 |   |
| ** **                                                                                                                                                                                                                                    |   |                  |    |   |   |
| **STOCKHOLDERS’  EQUITY**                                                                                                                                                                                                                |   |                  |    |   |   |
| Preferred stock  ($.01 par value; 1,000,000 shares authorized, none issued and outstanding at  December 31, 2008 and December 31, 2007)                                                                                             |   | —                |    | — |   |
| Common stock  ($.01 par value; 35,000,000 shares authorized, 14,679,750 shares issued and  14,066,559 shares outstanding at December 31, 2008 and 14,679,750 shares  issued and 14,352,750 shares outstanding at December 31, 2007) |   | 147                   |    | 147 |   |
| Additional  paid-in capital                                                                                                                                                                                                                   |   | 63,516                |    | 62,909 |   |
| Treasury stock  (at cost, 613,191 shares at December 31, 2008 and 327,000 shares at  December 31, 2007)                                                                                                                             |   | (7,293                | )       | (3,924 | ) |
| Common stock  acquired by benefit plans                                                                                                                                                                                                       |   | (7,819                | )       | (8,732 | ) |
| Retained  earnings                                                                                                                                                                                                                            |   | 72,664                |    | 71,475 |   |
| Accumulated  other comprehensive income, net                                                                                                                                                                                                  |   | 5                     |    | 496 |   |
| **Total  Stockholders’ Equity**                                                                                                                                                                                                          |   | 121,220               |    | 122,371 |   |
| ** **                                                                                                                                                                                                                                    |   |                  |    |   |   |
| **Total  Liabilities and Stockholders’ Equity**                                                                                                                                                                                          |   | $                     | 931,270 |   | $ | 812,919 |   |

 

*The accompanying notes are an integral part ofthese consolidated financial statements.*

 

F-4

----

Tableof Contents

 

***FOX CHASE BANCORP, INC.***

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS(IN THOUSANDS, EXCEPT PER SHARE DATA)**

 
| ** **                                                        | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                        | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| **INTEREST  INCOME**                                              |       |                                        |       |   |   |   |   |
| Interest and  fees on loans                                       |       | $                                           | 31,008     |   | $ | 25,361 |   | $ | 21,742 |   |
| Interest on  money market funds                                   |       | 536                                         |       | 40 |   | — |   |
| Interest on  mortgage related securities available-for-sale       |       | 12,356                                      |       | 7,329 |   | 8,035 |   |
| Interest on  investment securities available-for-sale:            |       |                                        |       |   |   |   |   |
| Taxable                                                           |       | 994                                         |       | 2,987 |   | 3,523 |   |
| Nontaxable                                                        |       | 613                                         |       | 924 |   | 934 |   |
| Dividend income                                                   |       | 246                                         |       | 249 |   | 370 |   |
| Other interest  income                                            |       | 131                                         |       | 4,167 |   | 2,573 |   |
| **Total  Interest Income**                                        |       | 45,884                                      |       | 41,057 |   | 37,177 |   |
| **INTEREST  EXPENSE**                                             |       |                                        |       |   |   |   |   |
| Deposits                                                          |       | 18,463                                      |       | 20,526 |   | 18,974 |   |
| Federal Home  Loan Bank advances                                  |       | 4,635                                       |       | 1,642 |   | 1,485 |   |
| Other borrowed  funds                                             |       | 963                                         |       | 82 |   | — |   |
| **Total  Interest Expense**                                       |       | 24,061                                      |       | 22,250 |   | 20,459 |   |
| **Net  Interest Income**                                          |       | 21,823                                      |       | 18,807 |   | 16,718 |   |
| Provision  (credit) for loan losses                               |       | 2,900                                       |       | 425 |   | (5,394 | ) |
| **Net  Interest Income after Provision (Credit) for Loan Losses** |       | 18,923                                      |       | 18,382 |   | 22,112 |   |
| **NONINTEREST  INCOME**                                           |       |                                        |       |   |   |   |   |
| Service charges  and other fee income                             |       | 748                                         |       | 842 |   | 1,138 |   |
| Net gain (loss)  on sale of:                                      |       |                                        |       |   |   |   |   |
| Securities  available-for-sale                                    |       | 118                                         |       | 169 |   | (17 | ) |
| Loans                                                             |       | 10                                          |       | 78 |   | 199 |   |
| Assets acquired  through foreclosure                              |       | —                                      |       | — |   | 85 |   |
| Premises and  equipment                                           |       | —                                      |       | 970 |   | (59 | ) |
| Income on  bank-owned life insurance                              |       | 452                                         |       | 438 |   | 427 |   |
| Other                                                             |       | 77                                          |       | 199 |   | 300 |   |
| **Total  Noninterest Income**                                     |       | 1,405                                       |       | 2,696 |   | 2,073 |   |
| **NONINTEREST  EXPENSE**                                          |       |                                        |       |   |   |   |   |
| Salaries,  benefits and other compensation                        |       | 11,313                                      |       | 9,949 |   | 9,194 |   |
| Occupancy  expense                                                |       | 1,879                                       |       | 1,828 |   | 1,496 |   |
| Furniture and  equipment expense                                  |       | 899                                         |       | 940 |   | 1,060 |   |
| Data processing  costs                                            |       | 1,610                                       |       | 1,537 |   | 1,514 |   |
| Professional  fees                                                |       | 1,124                                       |       | 1,846 |   | 1,781 |   |
| Marketing  expense                                                |       | 463                                         |       | 645 |   | 621 |   |
| FDIC premiums                                                     |       | 176                                         |       | 84 |   | 796 |   |
| Contribution to  charitable foundation                            |       | —                                      |       | — |   | 1,500 |   |
| Other                                                             |       | 1,484                                       |       | 1,859 |   | 1,905 |   |
| **Total  Noninterest Expense**                                    |       | 18,948                                      |       | 18,688 |   | 19,867 |   |
| **Income  Before Income Taxes**                                   |       | 1,380                                       |       | 2,390 |   | 4,318 |   |
| Income tax  provision                                             |       | 165                                         |       | 460 |   | 684 |   |
| **Net  Income**                                                   |       | $                                           | 1,215      |   | $ | 1,930 |   | $ | 3,634 |   |
| Earnings per  share (1):                                          |       |                                        |       |   |   |   |   |
| Basic                                                             |       | $                                           | 0.09       |   | $ | 0.14 |   | $ | 0.14 |   |
| Diluted                                                           |       | $                                           | 0.09       |   | $ | 0.14 |   | $ | 0.14 |   |

 

----

*(1)**      *Due to the timing ofthe 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 isonly for September 29, 2006 through December 31, 2006.

 

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

 

F-5

----

*Table of Contents*

 

***FOX CHASE BANCORP, INC.***

 

**CONSOLIDATEDSTATEMENTS OF CHANGES IN EQUITY (IN THOUSANDS)**

**For the Years Ended December 31,2008, 2007 and 2006**

** **
| ** **                                                                                                                                                                       | ** ** | ** ** | ** ** | ** **       | ** ** | ** **   | ** ** | **Common**             | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|--------------|------------|------------------------|------------|--------------|------------|-------------------|------------|------------|------------|
| ** **                                                                                                                                                                       | ** ** | ** ** | ** ** | ** **       | ** ** | ** **   | ** ** | **Stock**              | ** ** | ** **   | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                       | ** ** | ** ** | ** ** | **Additional**   | ** ** | ** **   | ** ** | **Acquired**           | ** ** | ** **   | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                       | ** ** | **Common** | ** ** | **Paid in** | ** ** | **Treasury** | ** ** | **by**                 | ** ** | **Retained** | ** ** | **Income/**       | ** ** | **Total**  | ** ** |
| ** **                                                                                                                                                                       | ** ** | **Stock**  | ** ** | **Capital**      | ** ** | **Stock**    | ** ** | **Benefit Plans** | ** ** | **Earnings** | ** ** | **(Loss)**        | ** ** | **Equity** | ** ** |
| **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      |       |
| Other  comprehensive income                                                                                                                                                      |       |       |       |             |       |         |       |                   |       |         |       | 1,447             |       | 1,447      |       |
| **BALANCE  - DECEMBER 31, 2006**                                                                                                                                                 |       | $          | 147        |             | $          | 62,365       |       | $                      | —     |         | $          | (5,371            | )          | $          | 69,545     |   | $ | (1,041 | ) | $ | 125,645 |   |
| Purchase of  treasury stock, net                                                                                                                                                 |       |       |       |             |       | (3,924       | )          |                   |       |         |       |              |       | (3,924     | )          |
| Purchase common  stock held in trust                                                                                                                                             |       |       |       |             |       |         |       | (3,745                 | )          |         |       |              |       | (3,745     | )          |
| Stock based  compensation expense                                                                                                                                                |       |       |       | 271              |       |         |       |                   |       |         |       |              |       | 271        |       |
| Unallocated ESOP  shares committed to employees                                                                                                                                  |       |       |       | 114              |       |         |       | 384                    |       |         |       |              |       | 498        |       |
| Shares allocated  in long-term incentive plan                                                                                                                                    |       |       |       | 159              |       |         |       |                   |       |         |       |              |       | 159        |       |
| Net income                                                                                                                                                                       |       |       |       |             |       |         |       |                   |       | 1,930        |       |              |       | 1,930      |       |
| Other  comprehensive income                                                                                                                                                      |       |       |       |             |       |         |       |                   |       |         |       | 1,537             |       | 1,537      |       |
| **BALANCE  - DECEMBER 31, 2007**                                                                                                                                                 |       | $          | 147        |             | $          | 62,909       |       | $                      | (3,924     | )            | $          | (8,732            | )          | $          | 71,475     |   | $ | 496 |   | $ | 122,371 |   |
| Purchase of  treasury stock, net                                                                                                                                                 |       |       |       |             |       | (3,369       | )          |                   |       |         |       |              |       | (3,369     | )          |
| Stock based  compensation expense                                                                                                                                                |       |       |       | 950              |       |         |       |                   |       |         |       |              |       | 950        |       |
| Issuance of  stock for vested equity awards                                                                                                                                      |       |       |       | (503             | )          |         |       | 529                    |       | (26          | )          |              |       | —     |       |
| Unallocated ESOP  shares committed to employees                                                                                                                                  |       |       |       | 56               |       |         |       | 384                    |       |         |       |              |       | 440        |       |
| Shares allocated  in long-term incentive plan                                                                                                                                    |       |       |       | 104              |       |         |       |                   |       |         |       |              |       | 104        |       |
| Net income                                                                                                                                                                       |       |       |       |             |       |         |       |                   |       | 1,215        |       |              |       | 1,215      |       |
| Other  comprehensive income                                                                                                                                                      |       |       |       |             |       |         |       |                   |       |         |       | (491              | )          | (491       | )          |
| **BALANCE  - DECEMBER 31, 2008**                                                                                                                                                 |       | $          | 147        |             | $          | 63,516       |       | $                      | (7,293     | )            | $          | (7,819            | )          | $          | 72,664     |   | $ | 5 |   | $ | 121,220 |   |

** **

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

 

F-6

----

Tableof Contents

 

***FOX CHASE BANCORP, INC.***

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS(IN THOUSANDS)**

 
| ** **                                                                                      | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                      |       |                                        |       |   |   |   |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                                        |       |                                        |       |   |   |   |   |
| Net income                                                                                      |       | $                                           | 1,215      |   | $ | 1,930 |   | $ | 3,634 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:              |       |                                        |       |   |   |   |   |
| Provision  (credit) for loan losses                                                             |       | 2,900                                       |       | 425 |   | (5,394 | ) |
| Depreciation                                                                                    |       | 981                                         |       | 1,024 |   | 1,229 |   |
| Net amortization  of securities premiums and discounts                                          |       | 804                                         |       | 231 |   | 809 |   |
| (Benefit)  provision for deferred income taxes                                                  |       | (1,159                                      | )          | (141 | ) | 997 |   |
| Shares committed  to be released to the ESOP                                                    |       | 440                                         |       | 498 |   | 512 |   |
| Shares earned in  the long-term incentive plan                                                  |       | 104                                         |       | 159 |   | 36 |   |
| Stock based  compensation expense                                                               |       | 950                                         |       | 271 |   | — |   |
| Pension plan  settlement                                                                        |       | 137                                         |       | — |   | — |   |
| Origination of  loans held for sale                                                             |       | (3,197                                      | )          | (6,764 | ) | (21,774 | ) |
| Proceeds from  sales of loans held for sale                                                     |       | 3,193                                       |       | 7,988 |   | 20,914 |   |
| Net realized  gains on sales of assets acquired through foreclosure and premises and  equipment |       | —                                      |       | (970 | ) | (26 | ) |
| Net (gain) loss  on sales of securities                                                         |       | (118                                        | )          | (169 | ) | 17 |   |
| Net gain on  sales of loans and loans held for sale                                             |       | (10                                         | )          | (78 | ) | (199 | ) |
| Earnings on  investment in bank-owned life insurance                                            |       | (452                                        | )          | (438 | ) | (427 | ) |
| Decrease  (increase) in mortgage servicing rights                                               |       | 239                                         |       | 111 |   | (9 | ) |
| Decrease  (increase) in accrued interest receivable and other assets                            |       | (521                                        | )          | 626 |   | 250 |   |
| Increase  (decrease) in accrued interest payable, accrued expenses and other  liabilities       |       | (1                                          | )          | 79 |   | (565 | ) |
| **Net  Cash Provided by Operating Activities**                                                  |       | 5,505                                       |       | 4,782 |   | 4 |   |
| ** **                                                                                      |       |                                        |       |   |   |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                                        |       |                                        |       |   |   |   |   |
| Net maturities  of interest-earning time deposits in other banks                                |       | —                                      |       | — |   | 600 |   |
| Equity  investment in unconsolidated entity                                                     |       | —                                      |       | (300 | ) | — |   |
| Investment  securities - available for sale:                                                    |       |                                        |       |   |   |   |   |
| Purchases                                                                                       |       | (18,488                                     | )          | (96,264 | ) | (28,418 | ) |
| Proceeds from  sales                                                                            |       | 72,398                                      |       | 36,268 |   | 17,205 |   |
| Proceeds from  maturities, calls and principal repayments                                       |       | 11,495                                      |       | 39,677 |   | 84,075 |   |
| Mortgage related  securities — available for sale:                                         |       |                                        |       |   |   |   |   |
| Purchases                                                                                       |       | (144,815                                    | )          | (91,720 | ) | (31,789 | ) |
| Proceeds from  sale                                                                             |       | 22,051                                      |       | — |   | — |   |
| Proceeds from  maturities, calls and principal repayments                                       |       | 57,398                                      |       | 46,451 |   | 61,396 |   |
| Net (increase)  decrease in loans                                                               |       | (125,505                                    | )          | (59,779 | ) | 12,209 |   |
| Purchases of  loan participations                                                               |       | (19,335                                     | )          | (32,064 | ) | — |   |
| Proceeds from  sales of loans                                                                   |       | —                                      |       | — |   | 4,000 |   |
| Net increase in  Federal Home Loan Bank stock                                                   |       | (3,832                                      | )          | (1,453 | ) | (276 | ) |
| Increase in  other investments                                                                  |       | (120                                        | )          | — |   | — |   |
| Purchases of  premises and equipment                                                            |       | (231                                        | )          | (2,609 | ) | (1,422 | ) |
| Proceeds from  sales of premises and equipment and assets acquired through foreclosure          |       | 11                                          |       | 2,376 |   | 192 |   |
| **Net  Cash (Used) Provided by Investing Activities**                                           |       | (148,973                                    | )          | (159,417 | ) | 117,772 |   |
| ** **                                                                                      |       |                                        |       |   |   |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                                        |       |                                        |       |   |   |   |   |
| Net increase  (decrease) in deposits                                                            |       | 22,912                                      |       | (10,974 | ) | (85,773 | ) |
| Increase  (decrease) in advances from borrowers for taxes and insurance                         |       | 215                                         |       | 112 |   | (241 | ) |
| Federal Home  Loan Bank advances                                                                |       | 70,000                                      |       | 50,000 |   | — |   |
| Principal  payments on Federal Home Loan Bank advances                                          |       | (3,621                                      | )          | — |   | — |   |
| Increase in  other borrowings                                                                   |       | 30,000                                      |       | 20,000 |   | — |   |
| Proceeds from  stock issuance, net of conversion costs                                          |       | —                                      |       | — |   | 62,348 |   |
| Acquisition of  stock for ESOP plan                                                             |       | —                                      |       | — |   | (5,755 | ) |
| Acquisition of  stock for equity incentive plan                                                 |       | —                                      |       | (3,745 | ) | — |   |
| Purchase of  treasury stock                                                                     |       | (3,369                                      | )          | (3,924 | ) | — |   |
| **Net  Cash Provided (Used) by Financing Activities**                                           |       | 116,137                                     |       | 51,469 |   | (29,421 | ) |
| **Net  (Decrease) Increase in Cash and Cash Equivalents**                                       |       | (27,331                                     | )          | (103,166 | ) | 88,355 |   |
| **CASH  AND CASH EQUIVALENTS — BEGINNING**                                                 |       | 31,275                                      |       | 134,441 |   | 46,086 |   |
| **CASH  AND CASH EQUIVALENTS — ENDING**                                                    |       | $                                           | 3,944      |   | $ | 31,275 |   | $ | 134,441 |   |
| **SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION**                                            |       |                                        |       |   |   |   |   |
| Interest paid                                                                                   |       | $                                           | 23,838     |   | $ | 22,287 |   | $ | 20,363 |   |
| Income taxes  paid                                                                              |       | $                                           | 916        |   | $ | 319 |   | $ | 487 |   |
| Transfers of  loans to assets acquired through foreclosure                                      |       | $                                           | —     |   | $ | — |   | $ | — |   |

 

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

 

F-7

----

Tableof Contents

 

***FOX CHASE BANCORP, INC.***

 

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

** **

**Business**

 

Fox Chase Bancorp, Inc.(the “Bancorp”) was organized on September 29, 2006 under the laws of theUnited States for the purpose of being a holding company for Fox Chase Bank(the “Bank”), a stock savings bank also organized under the laws of the UnitedStates.  On September 29, 2006, theBancorp completed its initial public offering in which it sold 6,395,835shares, or 43.57%, of its outstanding common stock to the public, including575,446 shares purchased by the Fox Chase Bank Employee Stock Ownership Plan(the “ESOP”).  An additional 8,148,915shares, or 55.51% of the Bancorp’s outstanding stock, were issued to Fox ChaseMHC, the Bancorp’s federally chartered mutual holding company. Net proceeds ofthe offering totaled $56.6 million. Additionally, the Bancorp contributed $150,000 in cash and issued135,000 shares, or 0.92% of its outstanding common stock, to the Fox Chase BankCharitable Foundation.

 

The Bancorp’s primarybusiness has been that of holding the common stock of the Bank and making aloan to the ESOP.   The Bancorp isauthorized to pursue other business activities permissible by laws andregulations for savings and loan holding companies.

 

The Bancorp and the Bank(collectively referred to as the “Company”) provides a wide variety offinancial products and services to individuals and businesses through the Bank’seleven branches in Philadelphia, Richboro, Willow Grove, Warminster, Lahaska,Hatboro, Media and West Chester, Pennsylvania, and Ocean City, Marmora and EggHarbor Township, New Jersey.  In February 2009,the Bank increased its ownership in Philadelphia Mortgage Advisors, a mortgagebanker located in Blue Bell, Pennsylvania, from 20%, which was the Bank’sownership percentage at December 31, 2008, to approximately 45%.  The operations of the Company are managed asa single business segment.  The Companycompetes with other financial institutions and other companies that providefinancial services.

 

The Company is subject toregulations of certain federal banking agencies.  These regulations can and do changesignificantly from period to period.  TheCompany also undergoes periodic examinations by regulatory agencies which maysubject it to further changes with respect to asset valuations, amounts ofrequired loss allowances and operating restrictions resulting from theregulators’ judgments based on information available to them at the time oftheir examinations.

** **

**Principles ofConsolidation and Presentation**

 

The consolidatedfinancial statements include the accounts of both the Bancorp and the Bank. TheBank’s operations include the accounts of its wholly owned subsidiary, Fox ChaseFinancial, Inc.  Fox Chase Financial, Inc.is a Delaware chartered investment holding company whose sole purpose is tomanage and hold investment securities. The consolidated financial statements include the Bancorp beginning on September 29,2006.  The consolidated financialstatements and related notes include only the activity and balances of the Bankand its subsidiary through September 29, 2006.  The financial statements do not include thetransactions and balances of Fox Chase MHC. All material inter-company transactions and balances have beeneliminated in consolidation. Prior period amounts are reclassified, whennecessary, to conform with the current year’s presentation.

 

The Company followsaccounting principles and reporting practices which are in compliance with U.S.generally accepted accounting principles (“GAAP”). The preparation of thefinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates. Material estimates that are particularly susceptible to significantchange in the near term relate to the determination of the allowance for loanlosses, the valuation and realizability of deferred tax assets, the valuationof mortgage servicing rights and the evaluation of other than temporaryimpairment and valuation of investments.

 

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***FOX CHASE BANCORP, INC.***

 

**NOTE 1 - SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

** **

**Risk andUncertainties**

 

In the normal course ofits business, the Company encounters two significant types of risk: economicrisk and regulatory risk.  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 New Jersey.  The ability of the Company’s borrowers torepay amounts owed is dependent on several factors, including the economicconditions in the borrowers’ geographic regions and the borrowers’ financialconditions.   The Company also has creditrisk related to the risk of defaults in its investment securitiesportfolio.  The ability of the Company’sinvestment securities to be fully realized depends on several factors,including the cash flows, credit enhancements and underlying structures of theindividual investment securities. Market risk reflects changes in the value ofthe collateral underlying loans, the valuation of real estate held by theCompany, and the valuation of loans held for sale, securities, mortgageservicing assets and other investments.

 

The Company is subject tothe regulations of various government agencies. These regulations may change significantly from period to period.  The Company also undergoes periodic examinationsby regulatory agencies that may subject them to further changes with respect toasset valuations, amounts required for the allowance for loan losses andoperating restrictions resulting from the regulators’ judgment based oninformation available to them at the time of their examination.

** **

**Cash and CashEquivalents**

 

For purposes of reportingcash flows, cash and cash equivalents include cash and due from banks,interest-earning demand deposits in other banks and money market funds.  At times, such balances exceed the FDIClimits.

 

The Company accounts forcash accounts that are in a net overdraft position as a liability and reportschanges in book overdraft positions in operating cash flows.

** **

**Investment andMortgage Related Securities**

 

The Company accounts forits investment securities in accordance with Statement of Financial AccountingStandards (SFAS) No. 115, “Accounting for Certain Investments in Debt andEquity Securities.”  This standardrequires, among other things, that debt and equity securities are classifiedinto three categories and accounted for as follows:

 

·                  Debt securitieswith the positive intention to hold to maturity are classified as “held-to-maturity”and reported at amortized cost.

 

·                  Debt and equitysecurities purchased with the intention of selling them in the near future areclassified as “trading securities” and are reported at fair value, withunrealized gains and losses included in earnings.

 

·                  Debt and equitysecurities not classified 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 available-for-sale wouldbe based on various factors, including significant movement in interest rates,changes in maturity or mix of the Company’s assets and liabilities, liquidityneeds, regulatory capital considerations and other similar factors.

 

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***FOX CHASE BANCORP, INC.***

 

**NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

 

Management determines theappropriate classification of debt securities at the time of purchase andre-evaluates such designation as of each balance sheet date.

 

Purchase premiums anddiscounts are recognized in interest income using the interest method over theterms of the securities. Because of the volatility of the financial markets inwhich securities are traded, there is the risk that any future fair value couldbe significantly less than that recorded or disclosed in the accompanyingfinancial statements.  Declines in thefair value of available-for-sale securities below their cost that are deemed tobe other than temporary are reflected in earnings as realized losses.  In estimating other-than-temporary impairmentlosses, management considers (1) the length of time and the extent towhich the fair value has been less than cost, (2) the financial conditionand near-term prospects of the issuer and (3) the intent and ability ofthe Company to retain its investment in the issuer for a period of timesufficient 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.

 

Federal law requires a member institution of theFederal Home Loan Bank System to hold stock of its district Federal Home LoanBank according to a predetermined formula. The Company’s investment in FHLB of Pittsburgh stock is carried at costand was $9.7 million at December 31, 2008, which represented 4.75% of ouroutstanding borrowings plus 0.75% of our uncommitted line.  During December 2008, the FHLB ofPittsburgh announced that it does not intend to pay a dividend on its commonstock for the foreseeable future. Additionally, the FHLB of Pittsburgh indicated it would not redeem anycommon stock associated with member advance repayments and that it may increaseits individual member stock investment requirements. The FHLB of Pittsburgh ispermitted to increase the amount of capital stock owned by the Company to 6.00%of a members advances, plus 1.50% of the unused borrowing capacity.  As of December 31, 2008 the Company’smaximum stock obligation was $14.0 million.

** **

**Loans Held forSale**

 

The Company originatesmortgage loans for investment and for sale. At origination, a mortgage loan is identified as either for sale or forinvestment.  Mortgage loans originatedand intended for sale in the secondary market are carried at the lower ofaggregate cost or estimated fair value. Net unrealized losses are recognized by charges to operations.  Cash payments and cash receipts resultingfrom acquisitions and sales of loans are classified as operating cash flows ifthose loans are acquired specifically for resale and are carried at fair valueor the lower of cost or fair value. Cash receipts resulting from sales of loansthat were not specifically acquired for resale are classified as investing cashinflows regardless of a change in the purpose for holding those loans.  As of the balance sheet dates the Bank didnot hold any loans held for sale.

** **

**MortgageServicing Rights**

 

Upon the sale of aresidential mortgage loan where the Company retains servicing rights, amortgage servicing right is recorded. GAAP requires that mortgage servicingrights on these loans be amortized into income over the estimated life of theloans sold using the interest method.  Ateach reporting period, such assets are subject to an impairment test.  The impairment test stratifies servicingassets based on predominant risk characteristics of the underlying financialassets.  The Company has stratified itsmortgage servicing assets by date of sale, which approximates date oforigination.

 

In conjunction with theimpairment test, the Company records a valuation allowance when the fair valueof the stratified servicing asset is less than amortized cost.  Subsequent changes in the valuation of theassets are recorded as either an increase or a reduction of the valuationallowance, however, if the fair value exceeds amortized cost, such excess willnot be recognized.

 

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***FOXCHASE BANCORP, INC.***

 

**NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

** **

**Loans, LoanOrigination Fees and Uncollected Interest**

 

Loans are recorded atcost, net of unearned discounts, deferred fees and allowances.  Discounts or premiums on purchased loans areamortized using the interest method over the remaining contractual life of theportfolio, adjusted for actual prepayments. Loan origination fees and certain direct origination costs are deferredand amortized using the interest method over the contractual life as anadjustment to yield on the loans. Interest income is accrued on the unpaid principal balance.  From time-to-time, the Company sells certainloans for liquidity purposes or to manage interest rate risk.

 

The accrual of interestis generally discontinued when the contractual payment of principal or interesthas become 90 days past due or management has serious doubts about furthercollectibility of principal or interest, even though the loan is currently performing.  A loan that is more than 90 days past due 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 and theamortization of net deferred loan fees is suspended. Interest received onnonaccrual loans generally is either applied against principal or reported asinterest income, according to management’s judgment as to the ultimatecollectibility of principal.  Generally,loans are restored to accrual status when the obligation is brought current,has performed in accordance with the contractual terms for a reasonable periodof time and the ultimate collectibility of the total contractual principal andinterest is no longer in doubt.

** **

**Allowance for LoanLosses**

 

The allowance for loanlosses is adjusted through increases or reductions in the provisions for loanlosses charged against or credited to income. Loans deemed to be uncollectible are charged against the allowance forloan losses, and subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loanlosses is maintained at a level representing management’s best estimate ofknown and inherent losses in the portfolio, based upon management’s evaluationof the portfolio’s collectibility. Management’s evaluation is based upon an analysis of the size andcomposition of the loan portfolio, loss experience in particular segments ofthe portfolio, trends and absolute levels of nonperforming loans, trends andabsolute levels of classified and criticized loans, trends and absolute levelsin delinquent loans, trends in risk ratings, trends in industry charge-offs byparticular segments and changes in existing general economic and businessconditions affecting our lending areas and the national economy. Whilemanagement uses the best information available to make its evaluations, suchevaluations are highly subjective, and future adjustments to the allowance maybe necessary if conditions differ substantially from the assumptions used inmaking the evaluations.  Current economicconditions have increased the uncertainty inherent in these estimates andassumptions.  In addition, various regulatoryagencies periodically review the Company’s allowance for loan losses.  Such agencies may require the Company torecognize adjustments to the allowance, based on their judgments at the time oftheir examination.

 

Loans are deemed impairedwhen, based on current information and events, it is probable that the Companywill be unable to collect all proceeds due according to the contractual termsof the loan agreement.  Factorsconsidered by management in determining impairment include payment status,collateral value and the probability of collecting scheduled principal and interestpayments when due.  For purposes ofapplying measurement criteria for impaired loans, the Company generallyexcludes 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.

 

Impairment is measured ona loan by loan basis for commercial loans by either the present value ofexpected future cash flows discounted at the loan’s effective interest rate,the loan’s obtainable market price or the fair value of the collateral if theloan is collateral dependent.

 

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**Table of Contents**

 

***FOXCHASE BANCORP, INC.***

 

**NOTE 1 - SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

** **

**Assets AcquiredThrough Foreclosure**

 

Real estate and otherrepossessed collateral acquired through a foreclosure or by a deed-in-lieu offoreclosure are classified as assets acquired through foreclosure.  Assets acquired through foreclosure arecarried at the lower of cost or fair value, net of estimated sellingcosts.  Costs related to the developmentor improvement of a foreclosed property are capitalized; holding costs arecharged to expense as incurred. The Company had no such assets as of December 31,2008 and 2007.

** **

**Bank-Owned LifeInsurance**

 

The Company has investedin bank-owned life insurance (“BOLI”). BOLI involves the purchasing of life insurance by the Company on achosen group of employees and directors. The Company is the owner and beneficiary of the policies.  This life insurance investment is carried atthe cash surrender value of the underlying policies.  Income from the increase in cash surrendervalue of the policies is included in noninterest income in the consolidatedstatements of operations.  During 2008,the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 06-4, “Accountingfor Deferred Compensation and Postretirment Benefit Aspects of EndorsementSplit-Dollar Life Insurance Arrangements.” See Note 17 — Impact of Recent Accounting Pronouncements for furtherdiscussion.

** **

**Premises andEquipment**

 

Premises and equipmentare carried at cost less accumulated depreciation.  Depreciation is computed on the straight-linemethod over the assets’ estimated useful lives or, for leasehold improvements,over the life of the related lease if less than the estimated useful life ofthe asset. The estimated useful life is generally 10-39 years for buildings and3-7 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 improvements arecapitalized. Rental concessions on leased properties are recognized over thelife of the lease.

** **

**Transfers ofFinancial Assets**

 

Transfers of financialassets are accounted for as sales when control over the assets has beensurrendered.  Control over transferredassets is deemed to be surrendered when (1) the assets have been isolatedfrom the Company, (2) the transferee obtains the right (free of conditionsthat constrain it from taking advantage of that right) to pledge or exchangethe transferred assets and (3) the Company does not maintain effectivecontrol over the transferred assets through an agreement to repurchase thembefore maturity.

** **

**Income Taxes**

 

The Company accounts forincome taxes under the asset/liability method. Deferred tax assets are recognized for deductible temporary differencesand deferred tax liabilities are recognized for taxable temporary differences.  Temporary differences are the differencesbetween the reported amounts of assets and liabilities and their taxbases.  Deferred tax assets are reducedby a valuation allowance when, in the opinion of management, it is more likelythan not that some portion of the deferred tax assets will not berealized.  Deferred tax assets andliabilities are adjusted for the effects of changes in tax laws and rates onthe date of enactment. The Company files a consolidated federal income taxreturn and individual state and local income tax returns.

 

On January 1, 2007,the Company adopted Financial Interpretation No. 48 (FIN 48), “Accountingfor Uncertainty in Income Taxes — an Interpretation of SFAS Statement No. 109”.  FIN 48 requires that the Company recognize atax position if it is more likely than not that the tax position will besustained upon examination, including resolution of any related appeals orlitigation processes, based on the technical merits of the position.  If the tax position meets themore-likely-than-not recognition threshold, the position is measured todetermine the amount of the benefit to recognize and is measured at the largestamount of benefit that is

 

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***FOX CHASE BANCORP, INC.***

 

**NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

 

greater than 50% likelyof being realized upon settlement. The Company has no material tax exposurematters that are accrued as of December 31, 2008 or 2007.   The Company’s policy is to account forinterest as a component of interest expense and penalties as a component ofother expense.   The Company adopted thisstatement in 2007 and there was no effect on its results of operations orfinancial position.

** **

**Marketing andAdvertising**

 

The Company expensesmarketing and advertising costs as incurred.

** **

**Off-Balance SheetFinancial Instruments**

 

In the ordinary course of business, the Company hasentered into off-balance sheet financial instruments consisting of commitmentsto extend credit.  Such financialinstruments are recorded in the balance sheet when they are funded.  The Company uses the same credit policies inmaking commitments and conditional obligations as it does for on-balance sheetfinancial instruments.

** **

**FairValue of Financial Instruments**

 

The Company measures the fair values of assets andliabilities in accordance with SFAS No. 157, “Fair Value Measurements,”and other related guidance. Generally, fair value is the price that a willingbuyer and a willing seller would agree in other than a distressed salesituation. Because of the uncertainties inherent in determining fair value,fair value estimates may not be precise. Many of the fair value estimates arebased on highly subjective judgments and assumptions made about marketinformation and economic conditions. See Note 14 for a detailed discussion offair value measurements and methodology used to determine fair value.

** **

**PensionPlan**

 

SFAS No. 158, “Employers’ Accounting for           Defined Benefit Pension and OtherPostretirement                                         Plans,” became effective as of December 31, 2006, and requiresrecognition of an asset or liability in the statement of condition reflectingthe funded status of the Pension Plan with current year changes in the fundedstatus recognized in other comprehensive income (loss), net.  SFAS No. 158 did not change the existingcriteria for measurement of periodic benefit costs, plan assets or benefitobligations.  During 2008, the Bankterminated its pension plan.  See Note 9for further details on the Bank’s pension plan.

** **

**Employee StockOwnership Plan**

 

The ESOP is accounted forin accordance with the provisions of Statement of Position No. 93-6, “EmployerAccounting for Employee Stock Ownership Plans.” The funds borrowed by the ESOP from the Bancorp to purchase shares ofcommon stock in the Company’s initial public offering are being repaid from theBank’s contributions over a period of 15 years. The Bancorp’s common stock not yet allocated to participants is recordedas a reduction of stockholders’ equity at cost. The Bancorp’s loan to the ESOP and the ESOP’s note payable are notreflected in the consolidated statements of condition.

 

Compensation expense forthe ESOP is based on the average 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.

 

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***FOX CHASE BANCORP, INC.***

 

**NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

 

**Stock BasedCompensation**

 

On December 16,2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R,“Share-Based Payment,” which replaced SFAS No. 123, “Accounting forStock-Based Compensation” and superseded APB Opinion No. 25, “Accountingfor Stock Issued to Employees.” SFAS No. 123R requires that allshare-based payments to directors and employees, including grants of stockoptions and restricted stock awards, be recognized as compensation costs in thefinancial statements based on their fair values. The effective date of thisstatement for the Company was January 1, 2006.  We adopted this standard as required, in theaccounting for the Long-Term Incentive Plan in 2006, which includes unvestedshares (See Note 9). Employee stock options and restricted stock issued underthe 2007 Equity Incentive Plan are being accounted for under SFAS No. 123R.See Note 10 for further details on the 2007 Equity Incentive Plan.

 

**Per ShareInformation**

 

The Company follows theprovisions 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.  Unallocated shares in the ESOP (See Note 9),shares purchased to fund the 2007 Equity Incentive Plan (See Note 13) and treasurystock are not included in either basic or diluted earnings per share.

 

Earnings per share (“EPS”),basic and diluted, were $0.09 and $0.14 for the years ended December 31,2008 and 2007, respectively.  Due to thetiming of the Bank’s reorganization into the mutual holding company form oforganization and the completion of the Company’s initial public offering on September 29,2006, earnings per share information for the year ended December 31, 2006is only from September 29, 2006 through December 31, 2006.

 

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Tableof Contents

 

***FOX CHASE BANCORP, INC.***

 

**NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

 

The following tablepresents the reconciliation of the numerators and denominators of the basic anddiluted EPS computations.

 
| ** **                                                                                              | ** ** | **Year Ended**   | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                              | ** ** | **December 31,** | ** ** |
| ** **                                                                                              | ** ** | **2008**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income (for  2006, includes only the period from September 29,2006 to December 31,  2006) |       | $                     | 1,215,000  |   | $ | 1,930,000 |   | $ | 2,015,000 |   |
|                                                                                                    |       |                  |       |   |   |   |   |
| Weighted-average  common shares outstanding                                                             |       | 14,234,345            |       | 14,657,315 |   | 14,679,750 |   |
| Average common  stock acquired by stock benefit plans:                                                  |       |                  |       |   |   |   |   |
| Unvested shares  — long-term incentive plan                                                        |       | (25,091               | )          | (38,161 | ) | (36,381 | ) |
| ESOP shares  unallocated                                                                                |       | (480,988              | )          | (519,311 | ) | (562,522 | ) |
| Shares purchased  by trust                                                                              |       | (273,960              | )          | (71,042 | ) | — |   |
| Weighted-average  common shares used                                                                    |       |                  |       |   |   |   |   |
| to calculate  basic earnings per share                                                                  |       | 13,454,306            |       | 14,028,801 |   | 14,080,847 |   |
| Dilutive effect  of:                                                                                    |       |                  |       |   |   |   |   |
| Unvested shares  — long-term incentive plan                                                        |       | 25,091                |       | 38,161 |   | 36,381 |   |
| Restricted stock  awards                                                                                |       | 7,903                 |       | 1,858 |   | — |   |
| Weighted-average common shares used to calculate  diluted earnings per share                            |       | 13,487,300            |       | 14,068,820 |   | 14,117,228 |   |
|                                                                                                    |       |                  |       |   |   |   |   |
| Earnings per  share-basic                                                                               |       | $                     | 0.09       |   | $ | 0.14 |   | $ | 0.14 |   |
| Earnings per  share-diluted                                                                             |       | $                     | 0.09       |   | $ | 0.14 |   | $ | 0.14 |   |
|                                                                                                    |       |                  |       |   |   |   |   |
| Outstanding  common stock equivalents having no dilutive effect                                         |       | 786,877               |       | 720,342 |   | — |   |

 

**NOTE 2 — ADJUSTMENTS OFACCOUNTING ERRORS IN 2006**

 

During 2006, managementidentified and corrected certain accounting errors that occurred in prioryears.  Management evaluated thequantitative and qualitative impact of the corrections, individually and in theaggregate, on previously reported periods, in the results of operations in 2006and on reporting earnings trends.  Basedupon this evaluation, management concluded that such errors were not materialto the Company’s consolidated financial statements taken as a whole.  The adjustments, amounting to $313,000($207,000 after tax), increased expenses by $337,000 and increased other incomeby $24,000 in 2006.  Additionally, theCompany reduced its tax contingency reserve and expense by $105,000 in 2006after reevaluating the Company’s tax position.

 

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***FOXCHASE BANCORP, INC.***

** **

**NOTE 3 - INVESTMENT AND MORTGAGERELATED SECURITIES**

 

The amortized cost andfair value of securities available-for-sale as of December 31, 2008 and2007 are summarized as follows:

 
| ** **                                            | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **Amortized  Cost**             | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|                                                  |       | **(In  Thousands)**             |       |
|                                                  |       |                            |       |   |   |   |   |   |   |
| State and  political subdivisions                     |       | $                               | 14,679     |   | $ | 35 |   | $ | (251 | ) | $ | 14,463 |   |
| Corporate  securities                                 |       | 11,124                          |       | 4 |   | (550 | ) | 10,578 |   |
|                                                  |       | 25,803                          |       | 39 |   | (801 | ) | 25,041 |   |
|                                                  |       |                            |       |   |   |   |   |   |   |
| Private label  residential mortgage related security  |       | 889                             |       | — |   | (620 | ) | 269 |   |
| Private label  commercial mortgage related securities |       | 10,049                          |       | — |   | (2,745 | ) | 7,304 |   |
| Agency  residential mortgage related securities       |       | 257,990                         |       | 4,442 |   | (323 | ) | 262,109 |   |
| Total mortgage  related securities                    |       | 268,928                         |       | 4,442 |   | (3,688 | ) | 269,682 |   |
|                                                  |       |                            |       |   |   |   |   |   |   |
| **Total  securities**                                 |       | $                               | 294,731    |   | $ | 4,481 |   | $ | (4,489 | ) | $ | 294,723 |   |

 
| ** **                                            | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **Amortized  Cost**             | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|                                                  |       | **(In  Thousands)**             |       |
|                                                  |       |                            |       |   |   |   |   |   |   |
| Obligations of  U.S. government agencies              |       | $                               | 10,000     |   | $ | 16 |   | $ | — |   | $ | 10,016 |   |
| State and  political subdivisions                     |       | 81,019                          |       | 126 |   | (2 | ) | 81,143 |   |
|                                                  |       | 91,019                          |       | 142 |   | (2 | ) | 91,159 |   |
|                                                  |       |                            |       |   |   |   |   |   |   |
| Private label  residential mortgage related security  |       | 1,181                           |       | 27 |   | — |   | 1,208 |   |
| Private label  commercial mortgage related securities |       | 10,069                          |       | 68 |   | — |   | 10,137 |   |
| Agency  residential mortgage related securities       |       | 193,112                         |       | 983 |   | (295 | ) | 193,800 |   |
| Total mortgage  related securities                    |       | 204,362                         |       | 1,078 |   | (295 | ) | 205,145 |   |
|                                                  |       |                            |       |   |   |   |   |   |   |
| **Total  securities**                                 |       | $                               | 295,381    |   | $ | 1,220 |   | $ | (297 | ) | $ | 296,304 |   |

 

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***FOXCHASE BANCORP, INC.***

 

**NOTE 3 -INVESTMENT AND MORTGAGE RELATED SECURITIES (CONTINUED)**

 

At December 31, 2007, obligations of U.S. government agenciesincluded $10.0 million of investments in debt of the FHLB of Pittsburgh thatare not backed by the full faith and credit of the U.S. government.  These investments were called in 2008.

 

At December 31, 2007, investments of state and politicalsubdivisions included $60.0 million of Pennsylvania Higher Education AssistanceAgency auction rate bonds.  These bondswere subject to a new auction on a 28-day basis, had a weighted average rate of6.28% at December 31, 2007 and had a 40-year life with a contractualmaturity of 2046 and 2047.  Theseinvestments were sold in 2008.

 

Thefollowing tables show gross unrealized losses and fair value of securities,aggregated by security category and length of time that individual securitieshave been in a continuous unrealized loss position, at December 31, 2008and 2007:

 
| ** **                                            | ** ** | **December 31, 2008**        | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **Less than 12 Months** | ** ** | **12 Months or More** | ** ** | **Total** | ** ** |
| ** **                                            | ** ** | **Fair  Value**                        | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
|                                                  | ** ** | **(In  Thousands)**                    | ** ** |
|                                                  | ** ** | ** **                             | ** ** |
| State and  political subdivisions                     |       | $                                      | 8,645      |   | $ | (251 | ) | $ | — |   | $ | — |   | $ | 8,645 |   | $ | (251 | ) |
| Corporate  securities                                 |       | 9,214                                  |       | (550 | ) | — |   | — |   | 9,214 |   | (550 | ) |
|                                                  |       | 17,859                                 |       | (801 | ) | — |   | — |   | 17,859 |   | (801 | ) |
|                                                  |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Private label  residential mortgage related security  |       | 269                                    |       | (620 | ) | — |   | — |   | 269 |   | (620 | ) |
| Private label  commercial mortgage related securities |       | 7,304                                  |       | (2,745 | ) | — |   | — |   | 7,304 |   | (2,745 | ) |
| Agency  residential mortgage related securities       |       | 16,217                                 |       | (301 | ) | 717 |   | (22 | ) | 16,934 |   | (323 | ) |
| Total mortgage  related securities                    |       | 23,790                                 |       | (3,666 | ) | 717 |   | (22 | ) | 24,507 |   | (3,688 | ) |
|                                                  |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| **Total  securities**                                 |       | $                                      | 41,649     |   | $ | (4,467 | ) | $ | 717 |   | $ | (22 | ) | $ | 42,366 |   | $ | (4,489 | ) |

 
| ** **                                      | ** ** | **December 31, 2007**        | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **Less than 12 Months** | ** ** | **12 Months or More** | ** ** | **Total** | ** ** |
| ** **                                      | ** ** | **Fair  Value**                        | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| ** **                                      | ** ** | **(In  Thousands)**                    | ** ** |
| ** **                                      | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| State and  political subdivisions               |       | $                                      | 597        |   | $ | (1 | ) | $ | 672 |   | $ | (1 | ) | $ | 1,269 |   | $ | (2 | ) |
| Agency  residential mortgage related securities |       | 32,627                                 |       | (78 | ) | 25,977 |   | (217 | ) | 58,604 |   | (295 | ) |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| **Total  securities**                           |       | $                                      | 33,224     |   | $ | (79 | ) | $ | 26,649 |   | $ | (218 | ) | $ | 59,873 |   | $ | (297 | ) |

 

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***FOXCHASE BANCORP, INC.***

 

**NOTE 3 - INVESTMENT AND MORTGAGERELATED SECURITIES (CONTINUED)**

 

Management evaluatessecurities for other-than-temporary impairment on a quarterly basis, and morefrequently when economic or market concerns warrant. Management does notbelieve that any individual unrealized loss represented an other-than-temporaryimpairment at December 31, 2008. Management believes the temporaryimpairment on the securities classified as (a) state and politicalsubdivisions, (b) corporate securities, (c) private label residentialmortgage related security and (d) private label commercial mortgagerelated securities are directly related to unprecedented volatility and absenceof liquidity in the fixed income markets. The temporary impairment on theagency residential mortgage related securities is directly related to changesin market interest rates.

 

Of the 78 securities witha temporary impairment at December 31, 2008, 60 have a rating of AAA.  The securities rated less than AAA are threecorporate debt securities have a rating of A1 or higher, and 15 state orpolitical subdivision securities have a rating of Baa1 or higher.

 

Securities that have beenimpaired greater than twelve months are agency residential mortgage relatedsecurities. The decline in fair value of these securities was deemed temporarydue to positive factors supporting the recoverability of these securities andthe Company’s ability and intent to hold these investments to recovery.Positive factors considered include timely principal payments and the financialhealth of the issuer.

 

The Company hadone private label residential mortgage related security and three commercialmortgage related securities at December 31, 2008. The private labelmortgage related security has a credit rating of AAA and its amortized cost was$889,000 and $1.2 million at December 31, 2008 and 2007, respectively.This security has an unrealized loss of $620,000 and an unrealized gain of$27,000 as of December 31, 2008 and 2007, respectively. Managementbelieves the impairment on this security is temporary based on the cash flows,credit rating, credit enhancement, structure of the underlying security andmanagement’s ability and intent to hold to recovery.

 

The commercialmortgage related securities each have a credit rating of AAA and an amortizedcost of $10.0 million and $10.1 million at December 31, 2008 and 2007,respectively. The securities had a combined unrealized loss of $2.7 million anda combined unrealized gain of $68,000 at December 31, 2008 and 2007,respectively. Management believes the impairment on these securities istemporary based on the cash flows, credit rating, credit enhancement, structureof the underlying securities and management’s ability and intent to hold torecovery.

 

The Company evaluatescurrent characteristics of each of these private label securities such asdelinquency and foreclosure levels, credit enhancement, projected losses and coverage,and an analysis of the cash. It is possible that the underlying collateral ofthese securities will perform worse than current expectations, which may leadto adverse changes in cash flows on these securities and potential futureother-than-temporary impairment losses. Events that may trigger materialdeclines in fair values for these securities in the future would include butare not limited to deterioration of credit metrics, significantly higher levelsof default and severity of loss on the underlying collateral, deterioratingcredit enhancement and loss coverage ratios, or further illiquidity.

 

Theamortized cost and estimated fair value of investment securitiesavailable-for-sale at December 31, 2008 by contractual maturity are asfollows (excluding mortgage related securities):

 
| ** **                              | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **Amortized  Cost**             | ** ** | **Fair  Value** | ** ** |
| ** **                              | ** ** | **(In Thousands)**         | ** ** |
| ** **                              | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Due in one year  or less                |       | $                               | 6,913      |   | $ | 6,776 |   |
| Due after one  year through five years  |       | 5,782                           |       | 5,376 |   |
| Due after five  years through ten years |       | 7,551                           |       | 7,543 |   |
| Due after ten  years                    |       | 5,557                           |       | 5,346 |   |
|                                    |       | $                               | 25,803     |   | $ | 25,041 |   |

 

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***FOXCHASE BANCORP, INC.***

 

**NOTE 3 - INVESTMENT AND MORTGAGERELATED SECURITIES (CONTINUED)**

 

Gross gains of $118,000,$169,000 and $0 and gross losses of $0, $0 and $17,000 were realized on salesof securities during the years ended December 31, 2008, 2007 and 2006,respectively.

 

Securities with acarrying value of $4.3 million and $5.0 million at December 31, 2008 and2007, respectively, were pledged to secure public deposits and for otherpurposes as required or permitted by law.

 

Securities with acarrying value of $60.0 million at December 31, 2008 were pledged ascollateral for $50 million in borrowed funds. See Note 8.

** **

**NOTE 4 -LOANS**

 

The composition of netloans at December 31, 2008 and 2007 is provided below (in thousands).

 
| ** **                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Real estate  loans:                         | ** ** | ** **            | ** ** | ** ** | ** ** |
| One-to-four  family                         |       | $                     | 260,833    |   | $ | 215,817 |   |
| Multi-family and  commercial                |       | 155,564               |       | 76,287 |   |
| Construction                                |       | 65,002                |       | 46,471 |   |
|                                        |       |                  |       |   |   |
|                                        |       | 481,399               |       | 338,575 |   |
|                                        |       |                  |       |   |   |
| Consumer loans:                             |       |                  |       |   |   |
| Home equity                                 |       | 63,987                |       | 68,431 |   |
| Automobile                                  |       | 262                   |       | 565 |   |
| Home equity  lines of credit                |       | 11,486                |       | 9,642 |   |
| Other                                       |       | 351                   |       | 106 |   |
|                                        |       |                  |       |   |   |
|                                        |       | 76,086                |       | 78,744 |   |
|                                        |       |                  |       |   |   |
| Commercial loans                            |       | 37,371                |       | 33,356 |   |
|                                        |       |                  |       |   |   |
| **Total  loans**                            |       | 594,856               |       | 450,675 |   |
|                                        |       |                  |       |   |   |
| Deferred loan  origination cost (fees), net |       | 379                   |       | (264 | ) |
| Allowance for  loan losses                  |       | (6,260                | )          | (3,376 | ) |
|                                        |       |                  |       |   |   |
| **Net  loans**                              |       | $                     | 588,975    |   | $ | 447,035 |   |

 

The Company hadapproximately $91.4 million and $30.8 million of commercial mortgage andconstruction loans concentrated in the Southern New Jersey shore area at December 31,2008 and 2007, respectively.  Other thanthe commercial mortgage and construction loans in Southern New Jersey, amajority of the Company’s loans are in the geographic areas near the Company’sbranches in Southeastern Pennsylvania and New Jersey.

 

The Companyreclassified $18,000 and $21,000 of deposit accounts that were overdrawn toother consumer loans as of December 31, 2008 and 2007, respectively.

 

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***FOX CHASE BANCORP, INC.***

 

**NOTE 4 —LOANS (CONTINUED)**

 

The following tablepresents changes in the allowance for loan losses (in thousands):

 
| ** **                          | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                          | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance,  beginning                 |       | $                                           | 3,376      |   | $ | 2,949 |   | $ | 8,349 |   |
| Provision  (credit) for loan losses |       | 2,900                                       |       | 425 |   | (5,394 | ) |
| Loans charged  off                  |       | (19                                         | )          | (2 | ) | (8 | ) |
| Recoveries                          |       | 3                                           |       | 4 |   | 2 |   |
|                                |       |                                        |       |   |   |   |   |
| Balance, ending                     | ** ** | $                                           | 6,260      |   | $ | 3,376 |   | $ | 2,949 |   |

 

The recorded investmentin impaired loans requiring an allowance for loan losses was $6.4 million at December 31,2008 and $559,000 at December 31, 2007. The related allowance for loan losses associated with these loans was$1.0 million at December 31, 2008 and $109,000 at December 31,2007.  For the years ended December 31,2008, 2007 and 2006, the average recorded investment in these impaired loanswas $6.6 million, $47,000 and $2.5 million, respectively.  The interest income recognized on theseimpaired loans was $244,000, $30,000 and $631,000 for the years ended December 31,2008, 2007 and 2006, respectively.

 

Loans on which theaccrual of interest has been discontinued amounted to $5.9 million at December 31,2008 and $260,000 at December 31, 2007. If interest on such loans had beenrecorded in accordance with contractual terms, interest income would haveincreased by $170,000, $13,000 and $10,000 in 2008, 2007 and 2006,respectively. There were no loans past due 90 days or more and still accruinginterest at December 31, 2008. There were two loans past due 90 days or more totaling $559,000 stillaccruing interest at December 31, 2007. There were no loans classified as troubled debt restructurings as of December 31,2008 and 2007.

 

As of December 31,2008, the Bank had one interest rate swap in the notional amount of $1.2million to hedge a 15-year fixed rate loan, which was earning interest at7.43%.  The Company is receiving avariable rate payment of three-month LIBOR plus 2.24% and will pay fixed ratepayments of 7.43%. The swap matures in April 2022 and had a market valueloss position of $236,000 at December 31, 2008.

 

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***FOXCHASE BANCORP, INC.***

 

**NOTE 5 — MORTGAGE SERVICINGACTIVITY**

 

Loans serviced for othersare not included in the accompanying consolidated statements of condition.  The unpaid principal balances of these loanswere $109.6 million at December 31, 2008, $118.1 million at December 31,2007, and $130.3 million at December 31, 2006.  The Company received fees, net ofamortization, from the servicing of loans of $183,000, $210,000 and $249,000during 2008, 2007 and 2006, respectively.

 

The following summarizesmortgage-servicing rights for the years ended December 31, 2008, 2007 and2006 (in thousands):

 
| ** **                             | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                             | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance,  beginning                    |       | $                                           | 1,066      |   | $ | 1,177 |   | $ | 1,168 |   |
| Mortgage  servicing rights capitalized |       | —                                      |       | 1 |   | 140 |   |
| Mortgage  servicing rights amortized   |       | (106                                        | )          | (112 | ) | (131 | ) |
| Valuation  allowance                   |       | (133                                        | )          | — |   | — |   |
|                                   |       |                                        |       |   |   |   |   |
| Balance, ending                        |       | $                                           | 827        |   | $ | 1,066 |   | $ | 1,177 |   |

 

The estimatedamortization expense of amortizing mortgage servicing rights for each of thefive succeeding fiscal years after December 31, 2008 is as follows (inthousands):

 
| 2009       |   | $    | (221 | ) |
|------------|--------|------|------|---|
| 2010       |   | (166 | )    |
| 2011       |   | (123 | )    |
| 2012       |   | (90  | )    |
| 2013       |   | (66  | )    |
| Thereafter |   | (161 | )    |
| Total      |   | $    | (827 | ) |

 

As of December 31,2008 and 2007, the fair value of the mortgage servicing rights (“MSRs”) was$836,000 and $1.3 million, respectively. The fair value of the MSRs for these periods was determined using athird-party valuation model that calculates the present value of estimatedfuture servicing income. The model incorporates assumptions that marketparticipants use in estimating future net servicing income, including estimatesof prepayment speeds and discount rates. Mortgage loan prepayment speed is the annual rate at which borrowers areforecasted to repay their mortgage loan principal and is based on historicalexperience and current interest rates. 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.

 

During 2008, the Bankrecorded a total valuation allowance of $133,000 on its MSRs, which was due toa significant decrease in interest rates for residential mortgages during theyear resulting in assumed higher mortgage prepayments.

 

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***FOXCHASE BANCORP, INC.***

 

**NOTE6 - PREMISES AND EQUIPMENT**

 

The components ofpremises and equipment at December 31, 2008 and 2007 were as follows (inthousands):

 
| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2008**              | ** ** | **2007** | ** ** |
| ** **                         | ** ** | ** **            | ** ** | ** ** | ** ** |
| Land                               |       | $                     | 5,164      |   | $ | 5,164 |   |
| Buildings                          |       | 13,262                |       | 13,257 |   |
| Leasehold  improvements            |       | 174                   |       | 164 |   |
| Furniture,  fixtures and equipment |       | 4,829                 |       | 4,774 |   |
|                               |       | 23,429                |       | 23,359 |   |
| Less:  accumulated depreciation    |       | (9,724                | )          | (8,893 | ) |
| Premises and  Equipment, net       |       | $                     | 13,705     |   | $ | 14,466 |   |

 

During 2007, the Companysold its operations center premises and recorded a pre-tax gain of $874,000.

 

Land at December 31,2008 and 2007 includes an investment in a property in Absecon, New Jersey inthe amount of $1,957,000.

 

As of December 31,2008, the Company leased space for an operations center in Blue Bell,Pennsylvania, a branch location in Media, Pennsylvania and certain officeequipment. The leases are accounted for as operating leases.  The Blue Bell lease expires in July 2012and, upon expiration, the Company has the option to extend the lease for anadditional five-year period at the then prevailing market rate.  Thefollowing rental expenses were included in the Company’s financial statements(in thousands):

 
| ** **      | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------|------------|----------|------------|----------|------------|----------|------------|
| Office rent     |       | $        | 477        |     | $          | 401      |       | $ | 96 |   |
| Equipment lease |       | 28       |       | 23       |       | 12       |       |
|            |       | $        | 505        |     | $          | 424      |       | $ | 108 |   |

 

The followingtable shows the minimum future rental payments under non-cancelable leases forproperty and equipment at December 31, 2008 (in thousands):

 
| 2009 |   | $      | 498    |   |
|------|--------|--------|--------|--------|
| 2010 |   | 468    |   |
| 2011 |   | 461    |   |
| 2012 |   | 275    |   |
| 2013 |   | — |   |

 

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***FOXCHASE BANCORP, INC.***

 

**NOTE 7 -DEPOSITS**

 

The weighted averageinterest rate and balance of deposits at December 31, 2008 and 2007consist of the following (dollars in thousands):

 
| ** **                            | ** ** | **December 31,**                       | ** ** |
|---------------------------------------|------------|---------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                    | ** ** | **2007** | ** ** |
| ** **                            | ** ** | **Weighted   Average  Interest  Rate** | ** ** | **Amount** | ** ** | **Weighted  Average  Interest  Rate** | ** ** | **Amount** | ** ** |
| ** **                            | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Non-interest  bearing demand accounts |       | —                                      | %          | 46,716 |   | — | % | $ | 43,462 |   |
| NOW accounts                          |       | 1.13                                        |       | 35,330 |   | 1.70 |   | 39,299 |   |
| Money market  accounts                |       | 2.01                                        |       | 101,295 |   | 3.13 |   | 50,568 |   |
| Savings and club  accounts            |       | 0.25                                        |       | 51,196 |   | 0.65 |   | 54,019 |   |
| Certificates of  deposit              |       | 3.96                                        |       | 373,935 |   | 4.71 |   | 398,212 |   |
|                                  |       |                                        |       |   |   |   |   |   |   |
|                                  |       | 2.86                                        | %     | $ | 608,472 |   | 3.64 | % | $ | 585,560 |   |
|                                       |            |                                             |            |  |  |  |  |  |  |  |  |

 

The scheduled maturitiesof certificates of deposit for periods subsequent to December 31, 2008 areas follows (in thousands):

 
| ** ** | ** ** | **December 31,** | ** ** |
|------------|------------|-----------------------|------------|
| ** ** | ** ** | **2008**              | ** ** |
| ** ** | ** ** | ** **            | ** ** |
| 2009       |       | $                     | 200,237    |   |
| 2010       |       | 87,528                |       |
| 2011       |       | 36,120                |       |
| 2012       |       | 19,280                |       |
| 2013       |       | 17,146                |       |
| Thereafter |       | 13,624                |       |
|       |       |                  |       |
|       |       | $                     | 373,935    |   |

 

A summary of interestexpense on deposits for the years ended December 31, 2008, 2007 and 2006is as follows (in thousands):

 
| ** **                 | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|----------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| NOW accounts               |       | $          | 455        |       | $          | 732        |       | $ | 1,104 |   |
| Money market  accounts     |       | 1,852      |       | 1,266      |       | 579        |       |
| Savings and club  accounts |       | 158        |       | 424        |       | 557        |       |
| Certificates of  deposit   |       | 15,998     |       | 18,104     |       | 16,734     |       |
|                       |       |       |       |       |       |       |       |
|                       |       | $          | 18,463     |       | $          | 20,526     |       | $ | 18,974 |   |

 

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***FOXCHASE BANCORP, INC.***

 

**NOTE 7 —DEPOSITS (CONTINUED)**

 

The aggregate amount ofcertificates of deposit with a minimum denomination of $100,000 was $76,941,000and $77,264,000 at December 31, 2008 and 2007, respectively. In general,deposits in excess of $100,000 are not insured by the Federal Deposit InsuranceCorporation (FDIC).  However, during October 2008,the FDIC passed a temporary provision in which all deposits up to $250,000 willbe insured until December 31, 2009.

** **

**NOTE8 — BORROWINGS**

 

The following is asummary of borrowed funds by type:

 
| ** **            | ** ** | ** **                           | ** ** | ** **   | ** ** | **Maximum**         | ** ** | ** **          | ** ** | ** **          | ** ** |
|-----------------------|------------|--------------------------------------|------------|--------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|
| ** **            | ** ** | ** **                           | ** ** | ** **   | ** ** | **Amount**          | ** ** | ** **          | ** ** | **Weighted**        | ** ** |
| ** **            | ** ** | ** **                           | ** ** | ** **   | ** ** | **Outstanding**     | ** ** | **Average**         | ** ** | **Average**         | ** ** |
| ** **            | ** ** | ** **                           | ** ** | **Weighted** | ** ** | **at Month**   | ** ** | **Amount**          | ** ** | **Interest**        | ** ** |
| ** **            | ** ** | **Balance**                          | ** ** | **Average**  | ** ** | **End**             | ** ** | **Outstanding**     | ** ** | **Rate**            | ** ** |
| ** **            | ** ** | **at End of**              | ** ** | **Interest** | ** ** | **During the** | ** ** | **During the** | ** ** | **During the** | ** ** |
| ** **            | ** ** | **Year**                             | ** ** | **Rate**     | ** ** | **Year**            | ** ** | **Year**            | ** ** | **Year**            | ** ** |
| ** **            | ** ** | **(Dollars in thousands)** | ** ** |
| 2008                  |       |                                 |       |         |       |                |       |                |       |                |       |
| FHLB advances         |       | $                                    | 146,379    |         | 3.64       | %                   | $          | 146,379             |       | $                   | 122,145    |   | 3.73 | % |
| Other borrowed  funds |       | 50,000                               |       | 3.42         |       | 50,000              |       | 26,863              |       | 3.53                | %          |
|                  |       |                                 |       |         |       |                |       |                |       |                |       |
| 2007                  |       |                                 |       |         |       |                |       |                |       |                |       |
| FHLB advances         |       | $                                    | 80,000     |         | 3.94       | %                   | $          | 80,000              |       | $                   | 34,422     |   | 4.70 | % |
| Other borrowed  funds |       | 20,000                               |       | 3.60         |       | 20,000              |       | 2,222               |       | 3.62                | %          |

 

**FederalHome Loan Bank Advances**

 

Advances from the FHLB ofPittsburgh with rates ranging from 2.26% to 4.89% are due as follows:

 
| ** ** | ** ** | ** **                           | ** ** | **Weighted** | ** ** |
|------------|------------|--------------------------------------|------------|--------------|------------|
| ** ** | ** ** | ** **                           | ** ** | **Average**  | ** ** |
| ** ** | ** ** | **Amount**                           | ** ** | **Rate**     | ** ** |
| ** ** | ** ** | **(Dollars in Thousands)** | ** ** |
|       |       |                                 |       |         |       |
| 2009       |       | $                                    | 5,000      |         | 2.26       | % |
| 2010       |       | 10,000                               |       | 2.84         | %          |
| 2011       |       | 30,000                               |       | 4.88         | %          |
| 2012       |       | —                               |       |         |       |
| 2013-2018  |       | 101,379                              |       | 3.42         | %          |
|       |       | $                                    | 146,379    |         |       |   |

 

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***FOXCHASE BANCORP, INC.***

 

**NOTE 8 — BORROWINGS (CONTINUED)**

 

Pursuant to collateralagreements with the FHLB, advances are secured by qualifying first mortgageloans, qualifying fixed-income securities, FHLB stock and an interest-bearingdemand deposit account with the FHLB. As of December 31, 2008, the Bankhas $175.7 million in qualifying collateral pledged against its advances.

 
| **Maturity Date** | ** ** | **Interest Rate** | ** ** | **Strike Rate** | ** ** | **Call Date** | ** ** | **Amount**              | ** ** |
|------------------------|------------|------------------------|------------|----------------------|------------|--------------------|------------|-------------------------|------------|
| ** **             | ** ** | ** **             | ** ** | ** **           | ** ** | ** **         | ** ** | **(in thousands)** | ** ** |
|                   |       |                   |       |                 |       |               |       |                    |       |
| December 2009     |       | 2.26                   | %          |                 |       |               |       | $                       | 5,000      |   |
| February 2010     |       | 2.84                   | %          |                 |       |               |       | 10,000                  |       |
| August 2011       |       | 4.89                   | %          | 7.50                 | %          | February 2009 |       | 20,000                  |       |
| August 2011       |       | 4.87                   | %          | 7.50                 | %          | February 2009 |       | 10,000                  |       |
| July 2013         |       | 4.10                   | %          |                 |       |               |       | 9,904                   |       |
| December 2013     |       | 2.80                   | %          |                 |       | December 2010 |       | 5,000                   |       |
| January 2015      |       | 3.49                   | %          |                 |       |               |       | 26,475                  |       |
| December 2015     |       | 3.06                   | %          |                 |       | December 2011 |       | 5,000                   |       |
| November 2017     |       | 3.62                   | %          |                 |       | November 2010 |       | 15,000                  |       |
| November 2017     |       | 3.87                   | %          |                 |       | November 2011 |       | 15,000                  |       |
| December 2017     |       | 2.83                   | %          |                 |       | March 2009    |       | 20,000                  |       |
| December 2018     |       | 3.15                   | %          |                 |       | December 2012 |       | 5,000                   |       |
|                   |       |                   |       |                 |       |               |       |                    |       |
|                   |       |                   |       |                 |       |               |       | $                       | 146,379    |   |
|                        |            |                        |            |                      |            |                    |            |                         |            |  |  |

 

For the borrowings thatcontractually mature in August 2011, if three-month LIBOR is greater thanor equal to the Strike Rate, the FHLB can notify the Bank of its intention toconvert the borrowing to an adjustable-rate advance equal to three-month LIBOR(1.43% at December 31, 2008) plus .2175% on a quarterly basis. The Bankhas the option to repay these advances at each of the option dates withoutpenalty. Accordingly, the contractual maturities above may differ from actualmaturities.

 

The borrowing thatcontractually matures in December 2013 may be called by the FHLB on thecall date disclosed in the above table. If the borrowing is called, the Bankhas the option to either pay off the borrowing without penalty or the borrowing’sfixed rate resets to a variable rate of three-month LIBOR plus 1.04%.Subsequent to the call date, the borrowings are callable by the FHLBquarterly.  Accordingly, the contractualmaturities above may differ from actual maturities.

 

The borrowing thatcontractually matures in December 2015 may be called by the FHLB on thecall date disclosed in the above table. If the borrowing is called, the Bankhas the option to either pay off the borrowing without penalty or the borrowing’sfixed rate resets to a variable rate of three-month LIBOR plus 1.12%.Subsequent to the call date, the borrowings are callable by the FHLBquarterly.  Accordingly, the contractualmaturities above may differ from actual maturities.

 

The borrowings thatcontractually mature in November 2017 may be called by the FHLB on thecall date disclosed in the above table. If the borrowing is called, the Bankhas the option to either pay off the borrowing without penalty or the borrowing’sfixed rate resets to a variable rate of three-month LIBOR plus .10%. Subsequentto the call date, the borrowings are callable by the FHLB quarterly.  Accordingly, the contractual maturities abovemay differ from actual maturities.

 

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***FOXCHASE BANCORP, INC.***

 

**NOTE 8 — BORROWINGS (CONTINUED)**

 

The borrowing thatcontractually matures in December 2017 may be called by the FHLB on thecall date disclosed in the above table. If the borrowing is called, the Bankhas the option to either pay off the borrowing without penalty or the borrowing’sfixed rate resets to a variable rate of three-month LIBOR plus .11%.  Subsequent to the call date, the borrowing iscallable by the FHLB quarterly. Accordingly, the contractual maturities above may differ from actualmaturities.

 

The borrowing thatcontractually matures in December 2018 may be called by the FHLB on thecall date disclosed in the above table. If the borrowing is called, the Bank hasthe option to either pay off the borrowing without penalty or the borrowing’sfixed rate resets to a variable rate of three-month LIBOR plus 1.14%.Subsequent to the call date, the borrowings are callable by the FHLBquarterly.  Accordingly, the contractualmaturities above may differ from actual maturities.

 

The Bank has a maximumborrowing capacity with the Federal Home Loan Bank of Pittsburgh ofapproximately $481.7 million at September 30, 2008, the latest date forwhich information is available.

 

As a member of the FHLBof Pittsburgh, the Bank is required to acquire and hold shares of capital stockin the FHLB of Pittsburgh in an amount of at least equal to 4.75% of itsadvances from the FHLB of Pittsburgh, plus 0.75% of the unused borrowingcapacity.  The Bank was in compliancewith this requirement with a stock investment in the FHLB of Pittsburgh of $9.7million at December 31, 2008.

 

During December 2008,the FHLB of Pittsburgh announced that it does not intend to pay a dividend onits common stock for the foreseeable future. Additionally, the FHLB of Pittsburgh indicated it would not redeem anycommon stock associated with member advance repayments and that it may increaseits individual member stock investment requirements. The FHLB of Pittsburgh ispermitted to increase the amount of capital stock owned by the Company to 6.00%of a member’s advances, plus 1.50% of the unused borrowing capacity.  As of December 31, 2008 the Company’smaximum stock obligation was $14.0 million.

** **

**OtherBorrowed Funds**

 

Other borrowed fundsobtained from large commercial banks totaled $50.0 million at December 31,2008.  These borrowings contractuallymature with dates ranging from November 2014 thru November 2018 andmay be called by the lender based on the underlying agreements.  Subsequent to the call date, these borrowingsare callable by the lender quarterly. Accordingly, the contractual maturitiesabove may differ from actual maturities.

 
| **Maturity**        | ** ** | **Interest** | ** ** | ** **          | ** ** | ** **              | ** ** |
|---------------------|------------|--------------|------------|---------------------|------------|-------------------------|------------|
| **Date**            | ** ** | **Rate**     | ** ** | **Call Date**  | ** ** | **Amount**              | ** ** |
| ** **          | ** ** | ** **   | ** ** | ** **          | ** ** | **(in thousands)** | ** ** |
| November 2014  |       | 3.60         | %          | November 2009  |       | $                       | 20,000     |   |
| September 2018 |       | 3.40         | %          | September 2012 |       | 10,000                  |       |
| September 2018 |       | 3.20         | %          | September 2012 |       | 5,000                   |       |
| October 2018   |       | 3.15         | %          | October 2011   |       | 5,000                   |       |
| October 2018   |       | 3.27         | %          | October 2011   |       | 5,000                   |       |
| November 2018  |       | 3.37         | %          | November 2013  |       | 5,000                   |       |
|                |       |         |       |                |       | $                       | 50,000     |   |

 

Mortgage backedsecurities with a fair value of $60.0 million at December 31, 2008 werepledged as collateral for these other borrowed funds.

 

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**Tableof Contents**

 

***FOX CHASE BANCORP, INC.***

 

**NOTE9 — EMPLOYEE BENEFITS**

 

**DefinedBenefit Plan**

 

The Bank previouslymaintained a qualified non-contributory defined benefit retirement plancovering all employees meeting certain eligibility requirements.  The Bank amended the plan and froze thebenefits for current participants in the plan as of January 1, 2006.  In October 2006, the Bank resolved tosettle the obligations to the plan participants by terminating the plan, afterobtaining required approvals.  In thesecond quarter of 2008, the Bank received a determination letter from the IRSapproving the settlement of its plan obligations.  As of June 30, 2008, all planobligations were settled.

 

The assets of the Bank’sdefined benefit plan were held by a trustee and invested in mutual funds andcash equivalents.  For the years ended December 31,2007 and 2006, the composition of the funds was 0% and 33.0%, respectively, inmutual funds and 100.0% and 67.0%, respectively, in cash. The plan had noassets at December 31, 2008. Certain cash equivalents were held in deposit accounts at the Bank.  The investment strategy of the Plan was tomaintain an adequate return, while meeting the liquidity needs of thePlan.  The benefits were based on eachemployee’s years of service and the average of the highest three or fiveconsecutive annual salaries.  An employeebecomes fully vested upon completion of five years of qualifying service.

 

Effective December 31,2006, the Bank adopted SFAS Statement No. 158, “Employers’ Accounting forDefined Benefit Pensions and Other Post Retirement Plans.”

 

The following tablesprovide a roll forward of the changes in benefit obligations and plan assetsfor the most recent two years:

 
| **Change in benefit obligation:** | ** ** | **2008**                | ** ** | **2007**   | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                       | ** ** | **(In Thousands)** | ** ** |
| ** **                                       | ** ** | ** **              | ** ** | ** ** | ** ** |
| Net benefit  obligation at beginning of year     |       | $                       | 2,643      |       | $          | 2,389 |   |
| Interest cost                                    |       | 67                      |       | 120        |       |
| Actuarial loss                                   |       | 160                     |       | 134        |       |
| Benefits paid                                    |       | (2,870                  | )          | —     |       |
| Net benefit obligation  at end of year           |       | $                       | —     |       | $          | 2,643 |   |

 
| **Change in plan assets:**       | ** ** | **2008**                | ** ** | **2007**   | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                      | ** ** | **(In Thousands)** | ** ** |
| ** **                                      | ** ** | ** **              | ** ** | ** ** | ** ** |
| Fair value of  plan assets at beginning of year |       | $                       | 2,407      |       | $          | 2,302 |   |
| Actual return on  plan assets                   |       | 31                      |       | 105        |       |
| Employer  contributions                         |       | 432                     |       | —     |       |
| Benefits paid                                   |       | (2,870                  | )          | —     |       |
| Fair value of  plan assets at end of year       |       | $                       | —     |       | $          | 2,407 |   |

 

The fair value ofplan assets included deposits held at the Bank of $0 and $407,000 at December 31,2008 and 2007, respectively.

 

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***FOXCHASE BANCORP, INC.***

 

**NOTE 9 — EMPLOYEE BENEFITS(CONTINUED)**

 

The following tableprovides a reconciliation of benefit obligations, plan assets and funded statusof the plans:

 
| ** **                                                 | ** ** | **2008**                | ** ** | **2007** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                 | ** ** | **(In Thousands)** | ** ** |
| ** **                                                 | ** ** | ** **              | ** ** |
| Fair value of  plan assets end of year                     |       | $                       | —     |     | $          | 2,407 |   |
| Net benefit  obligation at end of year                     |       | —                  |       | 2,643    |       |
|                                                       |       | —                  |       |     |       |
| Funded Status  (plan assets less plan obligations)         |       | —                  |       | $        | (236       | ) |
| Net amount  recognized in the statement of condition       |       | —                  |       | $        | (236       | ) |
| Amounts  recognized in stockholders’ equity:          |       |                    |       |     |       |
| Net actuarial  loss                                        |       | $                       | —     |     | $          | (139 | ) |
| Deferred tax  asset                                        |       | —                  |       | 47       |       |
| Amount  recognized in accumulated other comprehensive loss |       | $                       | —     |     | $          | (92 | ) |

 

Thefollowing is a summary of significant actuarial assumptions (weighted averagebasis) at December 31, 2008, 2007 and 2006:

 
| ** **                                        | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Discount rate                                     | ** ** | n/a        |       | 5.00       | %          | 5.00       | %          |
| Expected  long-term rate of return on plan assets | ** ** | n/a        |       | 5.25       |       | 5.25       | ** ** |
| Rate of  compensation increase                    | ** ** | n/a        |       | —     |       | —     | ** ** |

 

TheBank determined the long-term rate of return on plan assets based on currentand expected asset allocations as well as historical returns and current marketconditions.  The discount rate assumptionswere based on the short-term plan cash outflows associated with the plannedliquidation in 2008 and were not applicable after settlement.

 

The following table setsforth the components of the defined benefit plan costs for the years presented:

 
| ** **                                                                                          | ** ** | **2008**                | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                          | ** ** | **(In Thousands)** | ** ** |
| ** **                                                                                          | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                                                        |       | $                       | —     |       | $          | —     |       | $ | — |   |
| Interest cost                                                                                       |       | 67                      |       | 120        |       | 121        |       |
| Return on plan  assets                                                                              |       | (31                     | )          | (105       | )          | (204       | )          |
| Amortization of  unrecognized net actuarial loss                                                    |       | 160                     |       | 143        |       | 49         |       |
| Settlement loss                                                                                     |       | 137                     |       | —     |       | —     |       |
| Net periodic  benefit costs (income) reported in salaries, benefits and other compensation  expense |       | $                       | 333        |       | $          | 158        |       | $ | (34 | ) |

 

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***FOXCHASE BANCORP, INC.***

 

**NOTE 9 — EMPLOYEE BENEFITS(CONTINUED)**

 

**401(k) Plan**

 

The Bank also has a 401(k) retirementplan covering all employees meeting certain eligibility requirements.  Employees may contribute a percentage oftheir salary to the Plan each year, subject to limitations which are set bylaw.  The Bank matches a portion of eachemployee contribution and also may make discretionary contributions, based onthe Bank’s performance.  The Bankprovides a matching contribution equivalent to 33% of the first 6% of thecontribution made by an employee.  TheBank’s matching contribution rate changed as of January 1, 2006 from 25%to 33%.  The Bank’s contributions to theplan on behalf of its employees resulted in an expenditure of $115,000, $83,000and $94,000 for the years ended December 31, 2008, 2007 and 2006,respectively.

** **

**EmployeeStock Ownership Plan**

 

The ESOP is atax-qualified plan designed to invest primarily in the Bancorp’s common stockthat provides employees meeting certain eligibility requirements with theopportunity to receive a funded retirement benefit, based primarily on thevalue of the Bancorp’s common stock.  TheESOP purchased 575,446 shares of common stock in the Bancorp’s minority stockoffering at a price of $10.00 per share with the proceeds of a loan from theBancorp to the ESOP.  The outstandingloan principal balance at December 31, 2008 and 2007 was $4,790,000 and$5,019,000, respectively.

 

Shares of the Bancorp’scommon stock pledged as collateral for the loan are released from the pledgefor allocation to Plan participants as loan payments are made.  The Bank releases shares annually based uponthe ratio that the current principal and interest payment bears to the currentand remaining scheduled future principal and interest payments.  Dividends declared on common stock held bythe ESOP and not allocated to the account of a participant can be used to repaythe loan.

 

At December 31,2008, there were a total of 115,089 ESOP shares committed to employees,representing 38,363 shares allocated and committed to be released in each ofthe years ended December 31, 2008, 2007 and 2006. ESOP shares that wereunallocated at December 31, 2008 totaled 460,357 and had a fair marketvalue of $5,064,000.  ESOP compensationexpense for the years ended December 31, 2008, 2007 and 2006 was $440,000,$498,000 and $512,000, respectively, representing the average fair market valueof shares allocated or committed to be released during the year.

# ** **

# **Long-Term Incentive Plan**

 

TheBank maintains the Fox Chase Bank Executive Long-Term Incentive Plan (the “Incentive Plan”) 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 President and ChiefExecutive Officer of the Bank and the President and Chief Executive Officerrecommends the incentive award amounts for each eligible employee.  Substantially all of the awards vest over afive-year period with 60% of the award vesting on the third anniversary of theplan year to which the award was granted, 80% on the fourth anniversary and100% on the fifth anniversary, unless otherwise determined by the Board ofDirectors on date of grant.  All planassets are invested in Bancorp common stock. The Incentive Plan became effective January 1, 2006.  During 2008, 2007 and 2006, the Bank recordedcompensation expense of $104,000, $159,000 and $144,000, respectively, for theIncentive Plan.  Remaining unvested compensation,which is invested in Bancorp common stock, is $208,000 at December 31,2008.  Such amounts will be ratablyrecognized as compensation expense over the remaining vesting periods.

 

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***FOX CHASE BANCORP, INC.***

 

**NOTE 10 — STOCK BASED COMPENSATION**

 

At the Bancorp’s annualmeeting of stockholders on May 22, 2007, stockholders approved the FoxChase Bancorp, Inc. 2007 Equity Incentive Plan (the “Plan”).  The Plan provides for a total of 1,007,030shares of common stock for issuance upon the grant or exercise of awards.  Of the shares available under the Plan,719,307 may be issued in connection with the exercise of stock options and287,723 may be issued as restricted stock. The Plan allows for the granting of non-statutory stock options (“NSOs”),incentive stock options and restricted stock. Options are granted at no lessthan the fair value of the Bancorp’s common stock on the date of the grant.

 

On August 31, 2007,certain officers, employees and outside directors were granted an aggregate of521,800 NSOs and 203,900 shares of restricted stock.  Additionally, the Company granted anadditional 1,000 shares to an officer in November 2007.  In accordance with SFAS No. 123R, “Share-BasedPayments,” the Company began to expense the fair value of all share-basedcompensation grants over the requisite service periods.

 

In September 2007,the Bancorp’s Board of Directors approved the funding of a trust that purchased287,500 shares of Bancorp’s common stock, or approximately 1.96% of the Bancorp’soutstanding common stock, to fund restricted stock awards under the Plan.  The 287,500 shares were purchased by thetrust at a weighted average cost of $13.02 per share.  During the third quarter of 2008, 40,620shares of restricted stock vested which reduced shares owned by the trust to246,880 shares.

 

During 2008, certainofficers, employees and outside directors were granted an aggregate of 101,400NSOs and 17,100 shares of restricted stock.

 

In accordance withSecurities Exchange Commission Staff Accounting Bulletin (“SAB”) No. 107,the Company classifies share-based compensation for employees and outsidedirectors within “Salaries, benefits and other compensation” in theConsolidated Statements of Operations to correspond with the same line item ascompensation paid. Additionally, SFAS No. 123R requires the Company toreport (1) the expense associated with the grants as an adjustment tooperating cash flows and (2) any benefits of realized tax deductions inexcess of previously recognized tax benefits on compensation expense as afinancing cash flow.  There were no suchexcess tax benefits in 2007 and 2008.

 

Stock options vest over afive-year service period and expire ten years after grant date.  The Company recognizes compensation expensefor the fair values of stock options using the straight-line method over therequisite service period for the entire award.

 

Restricted shares vestover a five-year service period.  Theproduct of the number of shares granted and the grant date market price of theCompany’s common stock determine the fair value of restricted shares under theCompany’s restricted stock plan.  The Companyrecognizes compensation expense for the fair value of restricted shares on astraight-line basis over the requisite service period for the entire award.

 

During the years ended December 31,2008 and 2007, the Company recorded $950,000 and $271,000 of stock basedcompensation expense, respectively, comprised of stock option expense of$408,000 and $111,000, respectively and restricted stock expense of $542,000and $160,000, respectively.  

 

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***FOXCHASE BANCORP, INC.***

 

**NOTE 10 — STOCK BASED COMPENSATION (CONTINUED)**

 

The following is asummary of the Bancorp’s stock option activity and related information for the2007 Equity Incentive Plan for the year ended December 31, 2007 and 2008:

 
| ** **                             | ** ** | ** **         | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **    | ** ** |
|----------------------------------------|------------|--------------------|------------|--------------|------------|-----------------|------------|---------------|------------|
| ** **                             | ** ** | ** **         | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                             | ** ** | **Number of** | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                             | ** ** | **Stock**          | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                             | ** ** | **Options**        | ** ** | **Price**    | ** ** | **Life**        | ** ** | **Value**     | ** ** |
|                                   |       |               |       |         |       |            |       |          |       |
| Outstanding at  December 31, 2006 |       | —             |       | $            | —     |            |       |          | $          | — |   |
| Granted                                |       | 522,800            |       | 12.38        |       |            |       |          |       |
| Exercised                              |       | —             |       | —       |       |            |       |          |       |
| Forfeited                              |       | (4,000             | )          | 12.38        |       |            |       |          |       |
| Outstanding at  December 31, 2007 |       | 518,800            |       | 12.38        |       | 9.7 years       |       |          |       |
| Granted                                |       | 101,400            |       | 11.42        |       |            |       | —        |       |
| Exercised                              |       | —             |       | —       |       |            |       |          |       |
| Forfeited                              |       | (5,000             | )          | 12.09        |       |            |       |          |       |
| Outstanding at  December 31, 2008 |       | 615,200            |       | 12.22        |       | 8.8 years       |       |          |       |
|                                   |       |               |       |         |       |            |       |          |       |
| Exercisable at  December 31, 2008 |       | 102,860            |       | $            | 12.38      |            | 8.7 years  |          | —     |   |
|                                        |            |                    |            |              |            |                 |            |               |            |  |  |

 

Management estimated thefair values of all option grants using the Black-Scholes option-pricingmodel.  Since there is limited historicalinformation on the volatility of the Bancorp’s stock, management considered theaverage volatilities of comparable public companies over a period equal to theexpected life of the options in determining the expected volatility rate usedin the estimation of fair value. Management estimated the expected life of the options using thesimplified method allowed under SAB No. 107.  The risk-free rate was determined utilizingthe Treasury yield for the expected life of the option contract.

 

The fair value of thestock option grants was estimated with the following weighted averageassumptions:

 
| ** **                     | ** ** | **2008**      | ** ** | **2007**      | ** ** |
|--------------------------------|------------|---------------|------------|---------------|------------|
| Expected  dividend yield       |       | 1.90%         |       | 1.90%         |       |
| Expected volatility            |       | 25.00%        |       | 25.00%        |       |
| Risk-free  interest rate       |       | 2.53% - 3.88% |       | 4.13% - 4.33% |       |
| Expected option  life in years |       | 6.50          |       | 6.50          |       |

 

The following is asummary of the Bancorp’s unvested options as of December 31, 2007 and 2008and changes therein during the years then ended:

 
| ** **                          | ** ** | ** **         | ** ** | **Weighted**        | ** ** |
|-------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                          | ** ** | **Number of** | ** ** | **Average**         | ** ** |
| ** **                          | ** ** | **Stock**          | ** ** | **Grant Date** | ** ** |
| ** **                          | ** ** | **Options**        | ** ** | **Fair Value** | ** ** |
|                                |       |               |       |                |       |
| Unvested at  December 31, 2006 |       | —             |       | $                   | —     |   |
| Granted                             |       | 522,800            |       | 3.40                |       |
| Exercised                           |       | —             |       | —              |       |
| Forfeited                           |       | (4,000             | )          | $                   | 3.40       |   |
| Unvested at  December 31, 2007 |       | 518,800            |       | $                   | 3.40       |   |
| Granted                             |       | 101,400            |       | 2.78                |       |
| Exercised                           |       | —             |       | —              |       |
| Vested                              |       | (102,860           | )          | 3.40                |       |
| Forfeited                           |       | (5,000             | )          | 3.20                |       |
| Unvested at  December 31, 2008 |       | 512,340            |       | $                   | 3.28       |   |
|                                     |            |                    |            |                     |            |  |  |

 

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***FOXCHASE BANCORP, INC.***

 

**NOTE 10 — STOCK BASED COMPENSATION (CONTINUED)**

 

Expected future expenserelating to the 512,340 non-vested options outstanding as of December 31,2008 is $1.5 million over a weighted average period of 3.8 years.

 

The following is asummary of the status of the Bancorp’s restricted stock as of December 31,2007 and 2008 and changes therein during the years then ended:

 
| ** **                          | ** ** | ** **         | ** ** | **Weighted**        | ** ** |
|-------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                          | ** ** | **Number of** | ** ** | **Average**         | ** ** |
| ** **                          | ** ** | **Restricted**     | ** ** | **Grant Date** | ** ** |
| ** **                          | ** ** | **Shares**         | ** ** | **Fair Value** | ** ** |
| Unvested at  December 31, 2006 |       | —             |       | $                   | —     |   |
| Granted                             |       | 203,900            |       | 12.38               |       |
| Vested                              |       | —             |       | —              |       |
| Forfeited                           |       | (500               | )          | $                   | 12.38      |   |
| Unvested at  December 31, 2007 |       | 203,400            |       | $                   | 12.38      |   |
| Granted                             |       | 17,100             |       | 11.42               |       |
| Vested                              |       | (40,620            | )          | 12.38               |       |
| Forfeited                           |       | (300               | )          | $                   | 12.38      |   |
| Unvested at  December 31, 2008 |       | 179,580            |       | $                   | 12.29      |   |
|                                     |            |                    |            |                     |            |  |  |  |

 

Expected futurecompensation expense relating to the 179,580 restricted shares at December 31,2008 is $2.0 million over a weighted average period of 3.7 years.

 

**NOTE 11 — INCOME TAXES**

 

The components of incometax expense for the years ended December 31, 2008, 2007 and 2006 are asfollows (in thousands):

 
| ** **     | ** ** | **December 31,** | ** ** |
|----------------|------------|-----------------------|------------|
| ** **     | ** ** | **2008**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Federal:       |       |                  |       |   |   |   |   |
| Current        |       | $                     | 1,323      |   | $ | 596 |   | $ | (313 | ) |
| Deferred       |       |                  | (1,159     | ) | (141 | ) | 997 |   |
|           |       |                  | 164        |   | 455 |   | 684 |   |
|           |       |                  |       |   |   |   |   |
| State, current |       | 1                     |       | 5 |   | — |   |
|           |       |                  |       |   |   |   |   |
|           |       | $                     | 165        |   | $ | 460 |   | $ | 684 |   |

 

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***FOXCHASE BANCORP, INC.***

 

**NOTE 11 —INCOME TAXES (CONTINUED)**

 

The provision for incometaxes differs from the statutory rate of 34% due to the following (inthousands):

 
| ** **                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2008**              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                         |       |                  |       |   |   |   |   |
| Federal income  tax at statutory rate of 34% |       | $                     | 469        |   | $ | 813 |   | $ | 1,468 |   |
| Tax exempt  interest, net                    |       | (181                  | )          | (265 | ) | (272 | ) |
| Bank-owned life  insurance                   |       | (154                  | )          | (149 | ) | (145 | ) |
| ESOP  compensation expense                   |       | 19                    |       | 39 |   | 44 |   |
| Other, net                                   |       | 12                    |       | 17 |   | (99 | ) |
| State taxes                                  |       | (121                  | )          | (43 | ) | (58 | ) |
| Increase (decrease)  in valuation allowance  |       | 121                   |       | 48 |   | (254 | ) |
|                                         |       |                  |       |   |   |   |   |
| **Total  provision**                         |       | $                     | 165        |   | $ | 460 |   | $ | 684 |   |
|                                         |       |                  |       |   |   |   |   |
| **Effective  tax rate**                      |       | 11.96                 | %          | 19.25 | % | 15.84 | % |

 

The net deferred taxasset consisted of the following components as of December 31, 2008 and2007 (in thousands):

 
| ** **                                            | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Deferred tax  assets:                                 |       |                  |       |   |   |
| Allowance for  loan losses                            |       | $                     | 2,128      |   | $ | 1,148 |   |
| Nonaccrual  interest                                  |       | 56                    |       | 6 |   |
| Unrealized  losses on securities available-for-sale   |       | 14                    |       | — |   |
| Accrued  compensation                                 |       | 106                   |       | 119 |   |
| Organizational  costs                                 |       | 2                     |       | 2 |   |
| Equity incentive  plans                               |       | 247                   |       | 92 |   |
| Accrued expenses                                      |       | 6                     |       | 56 |   |
| Deferred lease  liability                             |       | 39                    |       | 39 |   |
| Unfunded pension  obligation — SFAS No. 158 |       | —                |       | 47 |   |
| Charitable  contribution carryover                    |       | 340                   |       | 483 |   |
| State net  operating loss carryforward                |       | 797                   |       | 676 |   |
|                                                  |       | 3,735                 |       | 2,668 |   |
| Valuation  allowance                                  |       | (797                  | )          | (676 | ) |
|                                                  |       | 2,938                 |       | 1,992 |   |
| Deferred tax  liabilities:                            |       |                  |       |   |   |
| Prepaid expense  deduction                            |       | 157                   |       | 174 |   |
| Mortgage  servicing rights                            |       | 282                   |       | 363 |   |
| Loan origination  costs                               |       | 135                   |       | 142 |   |
| Depreciation of  premises and equipment               |       | 495                   |       | 570 |   |
| Unrealized gains  on securities available-for-sale    |       | —                |       | 333 |   |
|                                                  |       | 1,069                 |       | 1,582 |   |
|                                                  |       |                  |       |   |   |
| **Net  Deferred Tax Asset**                           |       | $                     | 1,869      |   | $ | 410 |   |

 

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***FOXCHASE BANCORP, INC.***

 

**NOTE 11 — INCOME TAXES(CONTINUED)**

 

Based on the Company’shistory of prior earnings and its expectation of future taxable income,management anticipates that it is more likely than not that the above deferredtax assets will be realized, except for the state net operating losscarryforward.

 

Retained earnings include$5,986,000 at December 31, 2008, 2007 and 2006, for which no provision forfederal income tax has been made.  Thisamount represents deductions for bad debt reserves for tax purposes, which wereonly allowed to savings institutions that met certain criteria prescribed bythe Internal Revenue Code of 1986, as amended. The Small Business Job Protection Act of 1996 (the “Act”) eliminated thespecial bad debt deduction granted solely to thrifts.  Under the terms of the Act, there would be norecapture of the pre-1988 (base year) reserves. However, these pre-1988reserves would be subject to recapture under the rules of the InternalRevenue Code if the Company pays a cash dividend in excess of earnings andprofits, or liquidates.

 

As of December 31,2008 and 2007, the Company had $0 of capital loss carryforwards for federalincome tax purposes, resulting in a deferred tax asset of $0 at both dates.

 

The Company had acharitable contribution carryover of $999,000 as of December 31, 2008,resulting in a deferred tax asset of $340,000. Utilization of this carryover is limited to 10% of taxable income on anannual basis. Such carryover will expire on December 31, 2011, if notutilized.

 

Approximately $797,000 ofgross deferred tax assets were related to state tax net operating losses at December 31,2008.  The Company has assessed avaluation allowance of $797,000 on this entire deferred tax asset due to anexpectation of such net operating losses expiring before being utilized.  The Company has $11,304,000 of state netoperating losses, which will begin to expire in 2009 if not utilized.

 

Effective January 1,2007,the Companyadopted FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty inIncome Taxes, an interpretation of FASB Statement No. 109.”  As of January 1,2007 and December 31, 2007,the Company had no material unrecognized tax benefitsor accrued interest and penalties.  The Company’s policy is toaccount for interest as a component of interest expense and penalties as acomponent of other expense.  Federal and state tax years 2005 through2008 were open for examination as of December 31, 2008.

** **

**NOTE 12— COMMITMENTS AND CONTINGENCIES**

** **

**LendingOperations**

 

The Company is a party tofinancial instruments with off-balance sheet risk in the normal course ofbusiness to meet the financing needs of its customers.  These financial instruments includecommitments to extend credit.  Thoseinstruments involve, to varying degrees, elements of credit risk in excess ofthe amount recognized on the statements of financial condition.

 

The Company’s exposure tocredit loss in the event of nonperformance by the other party to the financialinstrument for commitments to extend credit is represented by the contractualamount of those instruments.  The Companyuses the same credit policies in making commitments and conditional obligationsas it does for on-balance sheet instruments.

 

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***FOXCHASE BANCORP, INC.***

 

**NOTE 12— COMMITMENTS AND CONTINGENCIES (CONTINUED)**

 

A summary of the Company’sfinancial instrument commitments at December 31, 2008 and 2007 is asfollows (in thousands):

 
| ** **                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2008**              | ** ** | **2007** | ** ** |
| ** **                                  | ** ** | ** **            | ** ** | ** ** | ** ** |
| Commitments to  grant loans                 |       | $                     | 54,393     |   | $ | 52,107 |   |
| Unfunded  commitments under lines of credit |       | 37,382                |       | 36,232 |   |
| Standby letters  of credit                  |       | 3                     |       | 1,489 |   |
|                                        |       |                  |       |   |   |
|                                        |       | $                     | 91,778     |   | $ | 89,828 |   |

 

Commitments to extendcredit are agreements to lend to a customer as long as there is no violation ofany condition established in the contract. Since many of the commitments are expected to expire without being drawnupon, the total commitment amounts do not necessarily represent future cashrequirements.  Commitments generally havefixed expiration dates or other termination clauses and may require payment ofa fee.  The Company evaluates eachcustomer’s credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemednecessary by the Company upon extension of credit, is based on management’scredit evaluation.  Collateral heldvaries, but includes principally residential or commercial real estate.  Fixed rate commitments to grant loans were$10,201,000 and $7,884,000 as of December 31, 2008 and December 31,2007, respectively.  The interest rateson these fixed rate loans ranged from 6.25% to 7.75% as of December 31,2008 and 5.875% to 9.44% as of December 31, 2007.

# ** **

# **Legal Proceedings**

 

The Company isperiodically subject to various pending and threatened legal actions whichinvolve 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.

 

# **Data Processing**

 

The Company has enteredinto contracts 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, 2008 is as follows(in thousands):

 

| 2009 |   | $     | 1,614  |   |
|------|--------|-------|--------|--------|
| 2010 |   | 1,582 |   |
| 2011 |   | 1,536 |   |
| 2012 |   | 1,331 |   |
| 2013 |   | 1,331 |   |

 

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***FOX CHASE BANCORP, INC.***

 

**NOTE13 — STOCKHOLDERS’ EQUITY**

 

The Bank is subject tovarious regulatory capital requirements administered by federal bankingagencies. The Bancorp, as a savings and loan holding company, is not subject toseparate capital requirements.   Failureto meet minimum capital requirements can initiate certain mandatory andpossibly additional discretionary actions by regulators that, if undertaken,could have a direct material effect on the Bank’s consolidated financialstatements.  Under capital adequacyguidelines and the regulatory framework for prompt corrective action, the Bankmust meet specific capital guidelines that involve quantitative measures of theBank’s assets, liabilities and certain off-balance sheet items as calculatedunder regulatory accounting practices. The Bank’s capital amounts and classification are also subject toqualitative judgments by the regulators about components, risk weightings andother factors.

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Bank tomaintain minimum amounts and ratios (set forth below) of total and Tier 1capital (as defined in the regulations) to risk-weighted assets, and ofTier 1 capital to total assets, as defined.  Management believes, as of December 31,2008, that the Bank meets all capital adequacy requirements to which it wassubject.

 

As of December 31,2008, the Bank is categorized as well capitalized under the regulatoryframework for prompt corrective action. There are no conditions or events since that notification thatmanagement believes have changed the Bank’s category.

 

The Bank’s actual capitalamounts and ratios at December 31, 2008 and 2007 and the minimum amountsand ratios required for capital adequacy purposes and to be well capitalizedunder 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,  2008**                          |       |                                 |       |                                         |       |                                                                                             |       |   |   |   |   |   |   |
| Total risk-based  capital (to risk- weighted assets) |       | $                                    | 106,094    |                                         | 19.25      | %                                                                                                | $          | 344,090 | ** ** | 38.0 | % | $ | 355,113 | ** ** | 310.0 | % |
| Tier 1 capital  (to risk-weighted assets)            |       | 99,834                               |       | 18.11                                        |       | 322,045                                                                                     |       | 34.0 |   | 333,068 |   | 3 6.0 |   |
| Tier 1 capital  (to adjusted assets)                 |       | 99,834                               |       | 10.70                                        |       | 337,305                                                                                     |       | 34.0 |   | 346,631 |   | 3 5.0 |   |
|                                                 |       |                                 |       |                                         |       |                                                                                             |       |   |   |   |   |   |   |
| **December 31,  2007**                          |       |                                 |       |                                         |       |                                                                                             |       |   |   |   |   |   |   |
| Total risk-based  capital (to risk- weighted assets) |       | $                                    | 101,010    |                                         | 22.54      | %                                                                                                | $          | 335,858 | ** ** | 38.0 | % | $ | 344,823 | ** ** | 310.0 | % |
| Tier 1 capital  (to risk-weighted assets)            |       | 97,634                               |       | 21.78                                        |       | 317,929                                                                                     |       | 34.0 |   | 326,894 |   | 3 6.0 |   |
| Tier 1 capital  (to adjusted assets)                 |       | 97,634                               |       | 12.03                                        |       | 332,472                                                                                     |       | 34.0 |   | 340,590 |   | 3 5.0 |   |

 

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***FOX CHASE BANCORP, INC.***

 

**NOTE 13 — STOCKHOLDERS’ EQUITY(CONTINUED)**

 

The Company’s ability topay dividends is limited by statutory and regulatory requirements.  The Company may not declare nor pay dividendson its stock if such declaration or payment would violate statutory orregulatory requirements.  During 2007,the Bancorp purchased 287,500 shares of common stock to fund its equityincentive plan for $3.7 million which was recorded as common stock acquired bystock benefit plans on the Bancorp’s statements of condition.  Additionally, the Bancorp repurchased 286,191and 327,000 shares of common stock during the years ended December 31,2008 and 2007, respectively, in conjunction with a stock repurchaseprogram.  The purchases were recorded astreasury stock, at cost, on the Company’s statements of condition in theamounts of $3.4 million and $3.9 million at December 31, 2008 and 2007,respectively.

** **

**During2005, the Bank’s primary regulator, the Office of Thrift Supervision (the “OTS”),determined the Bank was in “troubled condition” and issued a Cease and DesistOrder (the “Order”) instructing the Bank to discontinue the origination ofcertain types of loans until further notice, among other restrictions.  On June 28, 2006, the OTS terminated theOrder, and also noted that the Bank is no longer deemed to be in a “troubledcondition.”**

** **

**NOTE14 - FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

Management uses its bestjudgment in estimating the fair value of the Company’s financial instruments;however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financialinstruments, the fair value estimates herein are not necessarily indicative ofthe amounts the Company could have realized in a sales transaction on the datesindicated.  The estimated fair valueamounts have been measured as of their respective year ends, and have not beenreevaluated or updated for purposes of these consolidated financial statementssubsequent to those respective dates.  Assuch, the estimated fair values of these financial instruments subsequent tothe respective reporting dates may be different than the amounts reported ateach year-end.

 

The following informationshould not be interpreted as an estimate of the fair value of the entireCompany since a fair value calculation is only provided for a limited portionof the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree ofsubjectivity used in making the estimates, comparisons between the Company’sdisclosures and those of other companies may not be meaningful.  The following methods and assumptions wereused to estimate the fair values of the Company’s financial instruments at December 31,2008 and 2007:

** **

**Cash and CashEquivalents**

 

The carrying amounts ofcash and cash equivalents approximate their fair value.

** **

**Investment andMortgage Related Securities — Available-for-Sale**

 

Fair values forinvestments securities and mortgage related securities available-for-sale areobtained from a third party pricing service and are based on quoted marketprices, where available.  If quotedmarket prices are not available, fair values are based on quoted market pricesof comparable securities. If quoted market prices are not available forcomparable securities, fair value is based on quoted bids for the security orcomparable securities.

** **

**Loans Held forSale**

 

The fair values ofmortgage loans originated and intended for sale in the secondary market arebased on current quoted market prices.

** **

**Loans Receivable**

 

For variable-rate loansthat reprice frequently and that entail no significant changes in credit risk,fair values are based on carrying values. The fair value of fixed rate and other loans are estimated usingdiscounted cash flow analyses at interest rates currently offered for loanswith similar terms to borrowers of similar credit quality.

 

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***FOX CHASE BANCORP, INC.***

** **

**NOTE 14 - FAIRVALUE OF FINANCIAL INSTRUMENTS (CONTINUED)**

** **

**Federal Home LoanBank Stock**

** **

**The fair value of the Federal Home Loan Bank stockis estimated to be the carrying amount.**

** **

**Mortgage ServicingRights**

 

The fair value ofmortgage servicing rights is based on third party estimates of value whenavailable or the present value of expected future cash flows when notavailable.

** **

**Accrued InterestReceivable and Accrued Interest Payable**

 

The carrying amount ofaccrued interest receivable and accrued interest payable approximates fairvalue.

** **

**DepositLiabilities**

 

Fair values for demanddeposits (including NOW accounts), savings and club accounts and money marketdeposits are, by definition, equal to the amount payable on demand at thereporting date.  Fair values offixed-maturity certificates of deposit are estimated using a discounted cashflow calculation that applies interest rates currently being offered on similarinstruments with similar maturities.

** **

**Federal Home LoanBank Advances and Other Borrowed Funds**

 

Fair value of FederalHome Loan Bank advances and other borrowed funds are estimated using discountedcash flow analyses, based on rates currently available to the Bank for advanceswith similar terms and remaining maturities.

** **

**Off-Balance SheetFinancial Instruments**

 

Fair value of commitmentsto extend credit are estimated using the fees currently charged to enter intosimilar agreements, taking into account market interest rates, the remainingterms and present credit worthiness of the counterparties.

 

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***FOX CHASE BANCORP, INC.***

 

**NOTE 14 - FAIR VALUE OF FINANCIALINSTRUMENTS (CONTINUED)**

 

The estimated fair valuesof the Company’s financial instruments at December 31, 2008 and 2007 wereas follows (in thousands):

 
| ** **                                      | ** ** | **December 31** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **2008**             | ** ** | **2007** | ** ** |
| ** **                                      | ** ** | **Carrying  Amount** | ** ** | **Estimated  Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Estimated  Fair  Value** | ** ** |
|                                            |       |                 |       |   |   |   |   |   |   |
| Financial  assets:                              |       |                 |       |   |   |   |   |   |   |
| Cash and cash  equivalents                      |       | $                    | 3,944      |   | $ | 3,944 |   | $ | 31,275 |   | $ | 31,275 |   |
| Investment  securities available-for-sale       |       | 25,041               |       | 25,041 |   | 91,159 |   | 91,159 |   |
| Mortgage related  securities available-for-sale |       | 269,682              |       | 269,682 |   | 205,145 |   | 205,145 |   |
| Loans  receivable, net                          |       | 588,975              |       | 588,416 |   | 447,035 |   | 443,599 |   |
| Mortgage  servicing rights                      |       | 827                  |       | 836 |   | 1,066 |   | 1,258 |   |
| Federal Home  Loan Bank stock                   |       | 9,707                |       | 9,707 |   | 5,875 |   | 5,875 |   |
| Accrued interest  receivable                    |       | 3,721                |       | 3,721 |   | 3,360 |   | 3,360 |   |
|                                            |       |                 |       |   |   |   |   |   |   |
| Financial  liabilities:                         |       |                 |       |   |   |   |   |   |   |
| Savings and club  accounts                      |       | 51,196               |       | 51,196 |   | 54,019 |   | 54,019 |   |
| Demand, NOW and  money market Deposits          |       | 183,341              |       | 183,341 |   | 133,329 |   | 133,329 |   |
| Certificates of  deposit                        |       | 373,935              |       | 378,961 |   | 398,212 |   | 401,446 |   |
| Federal Home  Loan Bank advances                |       | 146,379              |       | 134,585 |   | 80,000 |   | 81,837 |   |
| Other borrowed  funds                           |       | 50,000               |       | 47,631 |   | 20,000 |   | 18,792 |   |
| Accrued interest  payable                       |       | 727                  |       | 727 |   | 504 |   | 504 |   |
|                                            |       |                 |       |   |   |   |   |   |   |
| Off-balance  sheet instruments                  | ** ** | **—**           |       | 688 | ** ** | **—** |   | 674 |   |
|                                                 |            |                      |            |  |  |  |  |  |  |  |  |  |  |

 

# **Statement of FinancialAccounting Standards No. 157 and No. 159**

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurement” (SFAS No. 157).  This statement defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair value measurements.  This statement applies under other accountingpronouncements that require or permit fair value measurements.   SFAS No. 157 became effective for theCompany on January 1, 2008, including interim periods.

 

SFAS No. 157describes three levels of inputs that may be used to measure fair value:

 

Level 1 - Inputs arequoted prices (unadjusted) in active markets for identical assets orliabilities that are accessible at the measurement date.

 

Level 2 - Inputs areother than quoted prices included within Level 1 that are observable for theasset or liability, either directly or indirectly, such as quoted prices forsimilar assets or liabilities; quoted prices in markets that are not active; orother inputs that are observable or can be corroborated by observable marketdata for substantially the full term of the assets or liabilities.

 

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***FOX CHASE BANCORP, INC.***

 

**NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)**

 

Level 3 - Valuations areobserved from unobservable inputs that are supported by little or no marketactivity and that are significant to the fair value of the assets orliabilities.

 

The Company classifiedthree types of financial instruments as Level 3 as of December 31, 2008.The first instrument is a private label collateralized mortgage obligation (“CMO”),the fair value of which, unlike U.S. agency mortgage related securities, ismore difficult to determine because they are not actively traded in securitiesmarkets.  The second instrument is threeprivate label commercial mortgage backed securities (“CMBS”), the fair value ofwhich is also more difficult to determine because they are not actively tradedin securities markets.  The thirdinstrument is a loan, which was recorded at fair value when the Company adoptedSFAS No. 159, since lending credit risk is not an observable input forthis individual commercial loan (see Note 4). The unrealized loss in the private label CMO was $620,000 at December 31,2008 compared to an unrealized gain of $27,000 at January 1, 2008.  The unrealized loss in the private label CMBSwas $2.7 million at December 31, 2008 compared to an unrealized gain of$68,000 at January 1, 2008. The unrealized gain on the loan was $236,000at December 31, 2008 compared to an unrealized gain of $60,000 at January 1,2008.

 

The following table of the Company’s fair value measurements atDecember 31, 2008 includes; (1) investment securities and mortgage relatedsecurities available-for-sale; (2) the two financial instruments recorded atfair value in conjunction with the Company’s adoption of SFAS No. 159 in 2008and (3) the impaired MSRs (which is a nonrecurring fair value measurement).

 
| ** **                                            | ** ** | ** **              | ** ** | **Fair Value Measurements at Reporting Date Using** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | ** **              | ** ** | **Quoted Prices in**                                                    | ** ** | **Significant** | ** ** | **Significant** | ** ** |
| ** **                                            | ** ** | ** **              | ** ** | **Active Markets**                                                           | ** ** | **Other** | ** ** | **Other** | ** ** |
| ** **                                            | ** ** | ** **              | ** ** | **for Identical**                                                            | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                                            | ** ** | **As of**          | ** ** | **Assets**                                                                        | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| **Description**                                       | ** ** | **12/31/2008**          | ** ** | **(Level 1)**                                                                | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| ** **                                            | ** ** | **(In Thousands)** | ** ** |
| State and  Political Subdivisions                     |       | $                       | 14,463     |                                                                              | $          | — |   | $ | 14,463 |   | $ | — |   |
| Corporate  Securities                                 |       | 10,578                  |       | —                                                                            |       | 10,578 |   | — |   |
| Private label  residential mortgage related security  |       | 269                     |       | —                                                                            |       | — |   | 269 |   |
| Private label  commercial mortgage related securities |       | 7,304                   |       | —                                                                            |       | — |   | 7,304 |   |
| Agency  residential mortgage related securities       |       | 262,108                 |       | —                                                                            |       | 262,108 |   | — |   |
| Loans (1)                                             |       | 1,425                   |       | —                                                                            |       | — |   | 1,425 |   |
| Mortgage  servicing rights                            |       | 735                     |       | —                                                                            |       | 735 |   | — |   |
| Other Assets —  Swap Contract (1)                |       | (236                    | )          | —                                                                            |       | (236 | ) | — |   |
| Total                                                 |       | $                       | 296,646    |                                                                              | $          | — |   | $ | 287,648 |   | $ | 8,998 |   |

 

----

(1) Suchassets are recorded at fair value in conjunction with adoption of SFAS No. 159.

 

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***FOX CHASE BANCORP, INC.***

** **

**NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)**

 

The following tableincludes a roll forward of the Significant Other Unobservable Inputs (Level 3)for the period of January 1, 2008 to December 31, 2008.

 
| ** **                               | ** ** | **Private Label** | ** ** | **Private Label** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **                               | ** ** | **Residential**        | ** ** | **Commercial**         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Mortgage**           | ** ** | **Mortgage**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Security**           | ** ** | **Securities**         | ** ** | **Loans**  | ** ** | **Total**  | ** ** |
|                                     |       |                   |       |                   |       |       |       |       |       |
| Beginning  balance, January 1, 2008 |       | $                      | 1,208      |                   | $          | —     |       | $          | 1,302      |   | $ | 2,510 |   |
| Payments  received                       |       | (289                   | )          | —                 |       | (54        | )          | (343       | )          |
| Premium  amortization                    |       | (1                     | )          | (20                    | )          | —     |       | (21        | )          |
| Increase/(decrease)  in value            |       | (649                   | )          | (2,725                 | )          | 177        |       | (3,197     | )          |
| Reclassification  to Level 3             |       | —                 |       | 10,049                 |       | —     |       | 10,049     |       |
|                                     |       |                   |       |                   |       |       |       |       |       |
| Ending balance,  December 31, 2008  |       | $                      | 269        |                   | $          | 7,304      |       | $          | 1,425      |   | $ | 8,998 |   |

 

The Company utilizes oneexternal pricing service (“primary pricing service”) as the provider of pricingon the investment portfolio on a quarterly basis. We generally obtain one quoteper investment security.  At December 31,2008, we obtained a second quote to substantiate the value of these privatelabel securities.  The fair valuesrecorded in the Company’s financial statements are from the primary pricingservice and represents a lower fair value than what was obtained from thesecond pricing service.  The Company madeno adjustments to the values obtained from the primary pricing service.

 

The Company will beevaluating the appropriateness of the identified Level 1, 2 or 3classifications on a recurring basis. The Company has also adopted FASB StaffPosition No. 157-2, which allowed it to defer the effective date of SFAS No. 157for certain nonfinancial assets and liabilities until January 1, 2009.

 

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***FOX CHASE BANCORP, INC.***

 

**NOTE 15 - COMPREHENSIVE INCOME**

 

Comprehensive income forthe years ended December 31, 2008, 2007 and 2006 is as follows (inthousands):

 
| ** **                                                                                                                      | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                      | ** ** | **2008**              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                                                            |       |                  |       |   |   |   |   |
| Net income                                                                                                                      |       | $                     | 1,215      |   | $ | 1,930 |   | $ | 3,634 |   |
|                                                                                                                            |       |                  |       |   |   |   |   |
| Other  comprehensive income (loss)                                                                                              |       |                  |       |   |   |   |   |
|                                                                                                                            |       |                  |       |   |   |   |   |
| Unrealized  holding gains (losses) arising during the period, net of taxes (2008 -  $(307), 2007 —$860, 2006- $777)        |       | (504                  | )          | 1,616 |   | 1,447 |   |
|                                                                                                                            |       |                  |       |   |   |   |   |
| Less:  Reclassification adjustment for gains (losses) included in net income, net of  taxes (2008 - $40, 2007 - $44, 2006 - $0) |       | 78                    |       | 86 |   | — |   |
|                                                                                                                            |       |                  |       |   |   |   |   |
| Plus:  Amortization of pension actuarial loss, net of taxes of $2 in 2008 and $3 in  2007                                       |       | 4                     |       | 7 |   | — |   |
| Reversal of  actuarial losses from pension plan settlement, net of taxes of $45                                                 |       | 87                    |       | — |   | — |   |
|                                                                                                                            |       |                  |       |   |   |   |   |
| Other  comprehensive income (loss)                                                                                              |       | (491                  | )          | 1,537 |   | 1,447 |   |
|                                                                                                                            |       |                  |       |   |   |   |   |
| Comprehensive  income                                                                                                           |       | $                     | 724        |   | $ | 3,467 |   | $ | 5,081 |   |

 

**NOTE 16 — RELATED PARTYTRANSACTIONS**

 

The Company may from timeto time enter into transactions with its directors, officers andemployees.  Such transactions are made inthe ordinary course of business on substantially the same terms and conditions,including interest rates and collateral, as those prevailing at the same timefor comparable transactions with other customers, and do not, in the opinion ofmanagement, involve more than the normal credit risk or present otherunfavorable features.

 

There were no loans todirectors and executive officers as of December 31, 2008 and 2007.

 

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***FOX CHASE BANCORP, INC.***

** **

**NOTE 17 -****IMPACT OF RECENT ACCOUNTINGPRONOUNCEMENTS**

 

In March 2006,the FASB issued SFAS No. 156, “Accounting for Servicing of FinancialAssets, an amendment of SFAS No. 140.” SFAS No. 156 amends SFAS No. 140 with respect to theaccounting for separately recognized servicing assets and servicing liabilitiesby requiring an entity to recognize a servicing asset or liability each time itundertakes an obligation to service a financial asset by entering into aservicing contract; requires all separately recognized servicing assets andliabilities to be initially measured at fair value, if practical; and permitsan entity to choose either of the following methods by which it willsubsequently measure each class of separately recognized servicing assets andliabilities:

 

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 an increase in obligation based on the fair valueat each 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. 156is effective for fiscal years beginning after September 15, 2006.  The Company adopted this statement in 2007and there was no effect on its results of operations or financial position asthe Company was already utilizing the amortization method.

 

In June 2006,FASB issued Financial Interpretation No. 48 (FIN 48), Accounting forUncertainty in Income Taxes — an interpretation of SFAS Statement No. 109.FIN 48 provides guidance on financial statement recognition and measurement ofa tax position taken or expected to be taken in a tax return. According to theInterpretation, a tax position is recognized if it is more likely than not thatthe tax position will be sustained upon examination, including resolution ofany related appeals or litigation processes, based on the technical merits ofthe position. If the tax position meets the more-likely-than-not recognitionthreshold, the position is measured to determine the amount of benefit torecognize and should be measured at the largest amount of benefit that isgreater than 50% likely of being realized upon ultimate settlement. FIN 48 alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition. The Company’s policyis to account for interest as a component of interest expense and penalties asa component of other expense. The provisions of FIN 48 are effective for fiscalyears beginning after December 15, 2006. The Company adopted this statement in 2007 and there was no effect onits results of operations or financial position.

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurement”.  This statement defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair valuemeasurements.  This statement appliesunder 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. 157is effective for fiscal years beginning after November 15, 2007.  Earlier adoption is encouraged, provided thatthe reporting entity has not yet issued financial statements for that fiscalyear, including financial statements for an interim period within that fiscalyear.  The Company adopted this statementin 2008 as disclosed in Note 14.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities—Including an Amendment of FASB Statement No. 115(SFAS 159).” SFAS 159 permits entities to choose to measure many financialinstruments and certain other items at fair value and amends SFAS 115 to, amongother things, require certain disclosures for amounts for which the fair valueoption is applied.  Additionally, thisStatement provides that an entity may reclassify held-to-maturity andavailable-for-sale securities to the trading account when the fair value optionis elected for such securities, without calling into question the intent tohold 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. The Company adopted this statement in 2008 as discussed in Note 14.

 

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***FOX CHASE BANCORP, INC.***

 

**NOTE 17 -****IMPACTOF RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)**

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements (SFAS 160).”  SFAS160 will require noncontrolling interests (previously referred to as minorityinterests) to be treated as a separate component of equity, not as a liabilityor other item outside of permanent equity. The statement applies to the accounting for noncontrolling interests andtransactions with noncontolling interest holders in consolidated financialstatements.  SFAS 160 is effective forperiods beginning on or after December 15, 2008, with earlier applicationprohibited.  The Company does not believethis statement will have a material effect on its results of operations orfinancial position, if any.

 

The FASB approved theEmerging Issues Task Force Issue No. 06-4, “Accounting for DeferredCompensation and Postretirement Benefit Aspects of Endorsement Split-DollarLife Insurance Arrangements.”  In thisissue, the EITF concluded that an endorsement split-dollar life insurancepolicy does not effectively settle an employer’s obligation to provide the postretirement benefit that the policy was designed to provide.

 

This guidance applies toall 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 post-retirement period.

 

Compliance with this EITFmust be applied to fiscal years beginning after December 15, 2007 (January 1,2008 for calendar year entities).  It canbe made through a cumulative—effect adjustment to retained earnings in the yearof adoption or as a change in accounting principles through retrospectiveapplication to all prior periods. The Company adopted this EITF in 2008 and itdid not have a material impact on the Company’s results of operations orfinancial position.

 

At its September 2006meeting, 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 inthe contractual terms of the policy; and (2) assume the surrender value ona individual-life by individual-life policy basis.  Issue 06-05 should be adopted througheither (1) a change in accounting principle through a cumulative-effectadjustment to retained earnings as of the beginning of the year of adoption or (2) achange in accounting principle through retrospective application to all priorperiods. Issue 06-05 is effective for fiscal years beginning after December 15,2006. The Company adopted this EITF in 2007 and it did not have a materialeffect on the Company’s financial position or results of operations.

 

InMarch 2008, the FASB issued SFAS No. 161 “Disclosures aboutDerivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133”(SFAS No. 161).  SFAS No. 161changes the disclosure requirements for derivative instruments and hedgingactivities.  Entities are required toprovide enhanced disclosures about (a) how and why an entity usesderivative instruments, (b) how derivative instruments and related hedgeditems are accounted for under Statement 133 and its related interpretations,and (c) how derivative instruments and related hedged items affect anentity’s financial position, financial performance, and cash flows.  SFAS No. 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008, with early application encouraged. The Company does not believe thisstatement will have a material effect on its results of operations or financialposition, if any.  The Company does notintend to early adopt this statement.

 

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***FOX CHASE BANCORP, INC.***

 

**NOTE 17 -****IMPACT OF RECENT ACCOUNTINGPRONOUNCEMENTS (CONTINUED)**

 

In June 2008, theFASB ratified Emerging Issues Task Force (EITF) Issue No. 03-6-1, “DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities” (EITF 03-6-1). EITF 03-6-1 requires companies toinclude participating share-based payment transactions, prior to vesting, inthe earnings allocation in computing earnings per share. EITF 03-6-1 definesparticipating share-based payment awards as those that contain nonforfeitablerights to dividends, even if granted prior to when an award vests. EITF 03-6-1is effective for financial statements issued for fiscal years beginning after December 15,2008, or the Company’s March 31, 2009 quarterly report on Form 10-Q.The adoption of EITF 03-6-1 is not expected to impact the Company’s earning pershare computations.

 

In December 2008,the FASB issued FASB Staff Position No. FAS 140-4 and FIN 46(R)-8, “Disclosuresby Public Entities (Enterprises) about Transfers of Financial Assets andInterests in Variable Interest Entities”. This staff position requirescompanies to disclose additional information about transfers of financialassets and interests in variable interest entities, including the following: atransferor’s continuing involvement in financial assets that it has transferredin a securitization or asset-backed financing arrangement, the nature of anyrestrictions and the carrying amounts of any assets held by an entity thatrelate to a transferred asset and how servicing assets and liabilities arereported under Statement 140. This staff position is effective for the firstreporting period ending after December 15, 2008, or December 31, 2008for the Company. See Note 5, “Mortgage Servicing Activity” for additionaldisclosures related to the Company’s MSRs.

 

In December 2008,the FASB issued FASB Staff Position No. FAS 132(R)-1, “Employers’Disclosures about Postretirement Benefit Plan Assets”. This staff positionamends FASB Statement No. 132 (revised 2003), “Employers’ Disclosuresabout Pensions and Postretirement Benefits”, to provide guidance on an employer’sdisclosures about plan assets of a defined benefit pension or otherpostretirement plans. This staff position is effective for disclosures aboutplan assets provided for fiscal years ending after December 15, 2009, or December 31,2009 for the Company. This staff position will not impact future disclosures asthe Company’s defined benefit pension plan was settled in 2008.

 

In January 2009, theFASB issued FASB Staff Position EITF 99-20-1, “Amendments to the ImpairmentGuidance in EITF Issue No. 99-20” (FSP EITF 99-20-1). This staff positionamends the impairment guidance in EITF No. 99-20, “Recognition of InterestIncome and Impairment on Purchased Beneficial Interests That Continue to BeHeld by a Transferor in Securitized Financial Assets”, to achieve moreconsistent determination of whether an other-than-temporary impairment hasoccurred for certain debt securities. Specifically, this staff positionprovides that when determining whether an impairment of a securitized financialasset is other-than-temporary the holder of that instrument must assess whetherthere has been a probable adverse change in expected cash flows and is notrequired to use “market participant” assumptions in that determination. FSPEITF 99-20-1 is effective for reporting periods ending after December 15,2008, or December 31, 2008 for the Company. The application of this staffposition did not impact the Company’s consolidated financial statements.

 

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***FOX CHASE BANCORP, INC.***

 

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

**** ****

****The following condensed financialstatements for Fox Chase Bancorp, Inc. (parent company only) reflect theinvestment in its wholly owned subsidiary, Fox Chase Bank, using the equitymethod of accounting.****

 

****CONDENSED BALANCESHEET****

 
| **** ****                                     | **** **** | ****December 31,**** | ** **     |
|----------------------------------------------------|----------------|---------------------------|----------------|
| **** ****                                     | **** **** | ****2008****              | **** **** | ****2007**** | **** **** |
| ** **                                         | ** **     | **(In Thousands)**   | ** **     |
| **ASSETS**                                         |           |                      |           |   |   |
| Cash and due  from banks                           |           | $                         | 12             |   | $ | 30 |   |
| Interest-bearing  deposits with banks              |           | 16,221                    |           | 19,099 |   |
| Total cash and  cash equivalents                   |           | 16,233                    |           | 19,129 |   |
| Investment in  subsidiary                          |           | 99,838                    |           | 98,129 |   |
| Deferred tax  asset                                |           | 340                       |           | 483 |   |
| Due from subsidiary                                |           | 149                       |           | — |   |
| ESOP loan                                          |           | 4,790                     |           | 5,019 |   |
| **Total  Assets**                                  |           | $                         | 121,350        |   | $ | 122,760 |   |
|                                               |           |                      |           |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**     |           |                      |           |   |   |
| Due to  subsidiary                                 |           | —                    |           | 70 |   |
| Other  liabilities                                 |           | 130                       |           | 319 |   |
| **Total  Liabilities**                             |           | 130                       |           | 389 |   |
|                                               |           |                      |           |   |   |
| **Stockholders’  Equity**                     |           | 121,220                   |           | 122,371 |   |
|                                               |           |                      |           |   |   |
| **Total  Liability and Stockholders’ Equity** |           | $                         | 121,350        |   | $ | 122,760 |   |

 

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***FOX CHASE BANCORP, INC.***

 

****NOTE 18 — PARENT COMPANY ONLY FINANCIAL STATEMENTS(CONTINUED)****

 

**CONDENSEDSTATEMENTS OF OPERATIONS**

 
| ** **                                                                                    | ** ** | **For the Years Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                    | ** ** | **December 31,**                  | ** ** |
| ** **                                                                                    | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                    | ** ** | **(In Thousands)**                | ** ** |
| **INCOME**                                                                                    |       |                                   |       |   |   |   |   |
| Interest on  deposits with banks                                                              |       | $                                      | 463        |   | $ | 986 |   | $ | 105 |   |
| Interest on ESOP  loan                                                                        |       | 414                                    |       | 432 |   | 121 |   |
| Gain on sale of  stock                                                                        |       | —                                 |       | 18 |   | — |   |
| Other income                                                                                  |       | —                                 |       | 1 |   | — |   |
|                                                                                          |       |                                   |       |   |   |   |   |
| **Total  Income**                                                                             |       | 877                                    |       | 1,437 |   | 226 |   |
| ** **                                                                                    |       |                                   |       |   |   |   |   |
| **EXPENSES**                                                                                  | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Contribution to  charitable foundation                                                        |       | —                                 |       | — |   | 1,500 |   |
| Other expenses                                                                                |       | 869                                    |       | 1,318 |   | 273 |   |
| **Total  Expenses**                                                                           |       | 869                                    |       | 1,318 |   | 1,773 |   |
| ** **                                                                                    |       |                                   |       |   |   |   |   |
| **Income  before income tax expense and equity in undistributed net earnings of  subsidiary** |       | 8                                      |       | 119 |   | (1,547 | ) |
| Income tax  expense                                                                           |       | 3                                      |       | 45 |   | (529 | ) |
| **Income  before equity in undistributed net earnings of subsidiary**                         |       | 5                                      |       | 74 |   | (1,018 | ) |
| Equity in  undistributed net earnings of subsidiary                                           |       | 1,210                                  |       | 1,856 |   | 4,652 |   |
|                                                                                          |       |                                   |       |   |   |   |   |
| **Net  Income**                                                                               |       | $                                      | 1,215      |   | $ | 1,930 |   | $ | 3,634 |   |

 

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***FOX CHASE BANCORP, INC.***

 

****NOTE18 — PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)****

 

**CONDENSED STATEMENTS OF CASHFLOWS**

** **
| ** **                                                                         | ** ** | **For the Years Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                         | ** ** | **December 31,**                  | ** ** |
| ** **                                                                         | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | **(In Thousands)**                | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                          | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                      | 1,215      |   | $ | 1,930 |   | $ | 3,634 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                   |       |   |   |   |   |
| Equity in  undistributed earnings of subsidiary                                    |       | (1,210                                 | )          | (1,856 | ) | (4,652 | ) |
| Net realized  gain on sale of securities                                           |       | —                                 |       | (18 | ) | — |   |
| Decrease in  deferred tax asset                                                    |       | 143                                    |       | — |   | 1,349 |   |
| Increase in due  from subsidiary                                                   |       | (148                                   | )          | — |   | (510 | ) |
| (Decrease)/  increase in other liabilities                                         |       | (259                                   | )          | 196 |   | 220 |   |
| **Net  Cash (Used) Provided by Operating Activities**                              |       | (259                                   | )          | 252 |   | 41 |   |
|                                                                               |       |                                   |       |   |   |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                          | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investment  securities, available for sale:                                        |       |                                   |       |   |   |   |   |
| Purchases                                                                          |       | —                                 |       | (89 | ) | — |   |
| Proceeds from  sales                                                               |       | —                                 |       | 107 |   | — |   |
| Issuance of ESOP  loan                                                             |       | —                                 |       | — |   | (5,755 | ) |
| Loan payment  received on ESOP loan                                                |       | 229                                    |       | 213 |   | 523 |   |
| Capital  contribution to subsidiary                                                |       | —                                 |       | — |   | (30,000 | ) |
| **Net  Cash Provided (Used) by Investing Activities**                              |       | 229                                    |       | 231 |   | (35,232 | ) |
|                                                                               |       |                                   |       |   |   |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                          | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Common stock  issued in conversion                                                 |       | —                                 |       | — |   | 147 |   |
| Repurchase of  treasury shares                                                     |       | (3,369                                 | )          | (3,924 | ) | — |   |
| Receipt from  subsidiary related to vesting of stock in equity incentive plan      |       | 503                                    |       | — |   | — |   |
| Acquisition of  stock to fund equity incentive plan                                |       | —                                 |       | (3,745 | ) | — |   |
| Proceeds from  stock offering, net                                                 |       | —                                 |       | — |   | 61,359 |   |
| **Net  Cash (Used) Provided by Financing Activities**                              |       |                                   | (2,866     | ) |   | (7,669 | ) | 61,506 |   |
|                                                                               |       |                                   |       |   |   |   |   |
| **Net  (Decrease) Increase in Cash and Cash Equivalents**                          |       | (2,896                                 | )          | (7,186 | ) | 26,315 |   |
|                                                                               |       |                                   |       |   |   |   |   |
| **Cash  and Cash Equivalents - Beginning**                                         |       | 19,129                                 |       | 26,315 |   | — |   |
|                                                                               |       |                                   |       |   |   |   |   |
| **Cash  and Cash Equivalents - Ending**                                            |       | $                                      | 16,233     |   | $ | 19,129 |   | $ | 26,315 |   |

 

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***FOX CHASE BANCORP, INC.***

 

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

** **

The following represents summarized quarterly financial data of FoxChase Bancorp, Inc, which, in the opinion of management, reflects alladjustments (comprising only normal recurring accruals) necessary for a fairpresentation.   The Company reported anet loss of $93,000 for the quarter ended December 31, 2008.  The net loss included a provision for loanlosses of $2.0 million, which was a result of: (1) downgrades to existingcredits, primarily in the residential real estate development portfolio; (2) increasesto loss factors for classified loans and the construction loan portfolio; and (3) theestablishment of a specific reserve of $624,000 related to a residentialhousing development located in southern New Jersey.

 
| **Three Months Ended**                     | ** ** | **12/31/2008**                                                     | ** ** | **9/30/2008** | ** ** | **6/30/2008** | ** ** | **3/31/2008** | ** ** | **12/31/2007** | ** ** | **9/30/2007** | ** ** | **6/30/2007** | ** ** | **3/31/2007** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|----------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                           | ** ** | **(In Thousands, except per share data)** | ** ** |
| ** **                                           | ** ** | ** **                                                         | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **     | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** |
| Interest income                                      |       | $                                                                  | 12,038     |          | $          | 11,597        |       | $             | 10,995     |           | $          | 11,254        |       | $             | 10,851     |          | $          | 10,593 |   | $ | 10,026 |   | $ | 9,587 |   |
| Interest expense                                     |       | 6,110                                                              |       | 5,778         |       | 5,854         |       | 6,319         |       | 5,817          |       | 5,684         |       | 5,513         |       | 5,236         |       |
| Net interest  income                                 |       | 5,928                                                              |       | 5,819         |       | 5,141         |       | 4,935         |       | 5,034          |       | 4,909         |       | 4,513         |       | 4,351         |       |
| Provision for  loan losses                           |       | 2,000                                                              |       | 500           |       | 225           |       | 175           |       | 225            |       | 125           |       | 75            |       | —        |       |
| Net interest  income after provision for loan losses |       | 3,928                                                              |       | 5,319         |       | 4,916         |       | 4,760         |       | 4,809          |       | 4,784         |       | 4,438         |       | 4,351         |       |
| Noninterest  income                                  |       | 250                                                                |       | 359           |       | 403           |       | 393           |       | 620            |       | 387           |       | 1,253         |       | 436           |       |
| Noninterest  expense                                 |       | 4,481                                                              |       | 4,789         |       | 4,956         |       | 4,722         |       | 5,063          |       | 4,626         |       | 4,542         |       | 4,457         |       |
| Income (loss)  before tax provision (benefit)        |       | (303                                                               | )          | 889           |       | 363           |       | 431           |       | 366            |       | 545           |       | 1,149         |       | 330           |       |
| Income tax  provision (benefit)                      |       | (210                                                               | )          | 230           |       | 59            |       | 86            |       | 36             |       | 90            |       | 297           |       | 37            |       |
| Net income (loss)                                    |       | $                                                                  | (93        | )             | $          | 659           |       | $             | 304        |           | $          | 345           |       | $             | 330        |          | $          | 455 |   | $ | 852 |   | $ | 293 |   |
|                                                 |       |                                                               |       |          |       |          |       |          |       |           |       |          |       |          |       |          |       |
| Per Common Share  Data                               |       |                                                               |       |          |       |          |       |          |       |           |       |          |       |          |       |          |       |
| Weighted average  common shares — basic         |       | 13,374,389                                                         |       | 13,416,015    |       | 13,491,869    |       | 13,536,245    |       | 13,777,040     |       | 14,116,856    |       | 14,116,693    |       | 14,107,103    |       |
| Weighted average  common shares — diluted       |       | 13,401,414                                                         |       | 13,442,841    |       | 13,539,152    |       | 13,561,363    |       | 13,814,595     |       | 14,155,596    |       | 14,155,560    |       | 14,145,970    |       |
| Net income (loss)  per share — basic            |       | $                                                                  | (0.01      | )             | $          | 0.05          |       | $             | 0.02       |           | $          | 0.03          |       | $             | 0.02       |          | $          | 0.03 |   | $ | 0.06 |   | $ | 0.02 |   |
| Net income (loss)  per share — diluted          |       | $                                                                  | (0.01      | )             | $          | 0.05          |       | $             | 0.02       |           | $          | 0.03          |       | $             | 0.02       |          | $          | 0.03 |   | $ | 0.06 |   | $ | 0.02 |   |

 

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###### **SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|                       |   |   | FOX CHASE BANCORP, INC.                |
|----------------------------|--------|--------|----------------------------------------|
|                       |   |   |                                   |
|                       |   |   |                                   |
|                       |   | By:    | /s/ Thomas M. Petro                    |
| Date:  March 12, 2009 |   |   | Thomas M. Petro                        |
|                       |   |   | President  and Chief Executive Officer |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **Name**                          | ** ** | **Title**                                        | ** ** | **Date**            |
|-----------------------------------|------------|--------------------------------------------------|------------|---------------------|
|                              |       |                                             |       |                |
| /s/ Thomas M. Petro               |       | President, Chief  Executive Officer and Director |       | March 12, 2009 |
| Thomas M. Petro                   |       | (principal executive  officer)                   |       |                |
|                              |       |                                             |       |                |
| /s/ Roger S. Deacon               |       | Chief Financial Officer                          |       | March 12, 2009 |
| Roger S. Deacon                   |       | (principal accounting  and financial officer)    |       |                |
|                              |       |                                             |       |                |
| /s/ Roger H. Ballou               |       | Director                                         |       | March 12, 2009 |
| Roger H. Ballou                   |       |                                             |       |                |
|                              |       |                                             |       |                |
| /s/ Richard E. Bauer              |       | Director                                         |       | March 12, 2009 |
| Richard E. Bauer                  |       |                                             |       |                |
|                              |       |                                             |       |                |
| /s/ Todd S. Benning               |       | Director                                         |       | March 12, 2009 |
| Todd S. Benning                   |       |                                             |       |                |
|                              |       |                                             |       |                |
| /s/ Richard M.  Eisenstaedt       |       | Director                                         |       | March 12, 2009 |
| Richard M. Eisenstaedt            |       |                                             |       |                |
|                              |       |                                             |       |                |
| /s/ Anthony A.  Nichols, Sr. |       | Director                                         |       | March 12, 2009 |
| Anthony A.  Nichols, Sr.     |       |                                             |       |                |
|                              |       |                                             |       |                |
| /s/ RoseAnn B.  Rosenthal         |       | Director                                         |       | March 12, 2009 |
| RoseAnn Rosenthal                 |       |                                             |       |                |
|                              |       |                                             |       |                |
|                              |       | Director                                         |       |                |
| Peter A. Sears                    |       |                                             |       |                |

 

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